ABSTRACT
This study provided an analysis of exchange rate movement and macroeconomic performance in West African Monetary Zone (WAMZ). The study applied panel VAR, panel fixed effect, and gravity model techniques to address the objectives of the study in the WAMZ region. The panel data for the study spanned from 1980 through 2020. Hence, with respect to objective one (investigation of the effect of exchange rate volatility on real gross domestic product in WAMZ member countries), the study found that exchange rate volatility has positive significant effect on the real gross domestic product in WAMZ member countries. The panel VAR impulse response function revealed that a one standard innovation in the volatilities in exchange rate produces significant positive effects on real gross domestic product. Hence, high volatilities of exchange rate significantly affect real gross domestic product in the next period. Put differently, as time passes, the effects of a shock on real gross domestic product today does not show any sign of decay to 0 within the study period. With respect to objective two (analysis of the effect of exchange rate revaluation on trade balance in WAMZ member countries), result shows that when exchange rate is revalued by a million US Dollar, trade balance in WAMZ countries would significantly improve. On objective three (ascertaining the effect of exchange rate devaluation on gross official foreign exchange reserves in WAMZ member countries), it was found that when exchange rate is devalued by one US Dollar, gross official foreign exchange reserves in WAMZ member countries would significantly rise. For objective four (determining the effect of real exchange rate on output growth in WAMZ member countries), result suggests through the study’s gravity panel fixed effect model that when there is depreciation of real exchange rate, output growth in WAMZ member countries would significantly fall. The reverse becomes the case when there is real exchange rate appreciation. The study therefore concludes that exchange rate movement has positive significant effect on macroeconomic performance in West African Monetary Zone member countries. Based on the findings, the study recommended that WAMZ member country Governments should strive harder to stabilize its exchange rates in order to encourage more investments in the zone, especially, the attraction of more foreign investments from the rest of the world.
TABLE OF CONTENTS
Title page i
Declaration ii
Certification ii
Dedication iv
Acknowledgement v
Table of Contents vi
List of Tables ix
List of Figures x
Abstract xi
CHAPTER
1: INTRODUCTION
1.1
Background to the Study 1
1.1.1 GDP Growth in the WAMZ 5
1.2
Statement of the Problem 8
1.3
Research Questions 8
1.4
Objectives of the Study 12
1.5
Hypotheses of the Study 12
1.6
Significance of the Study 13
1.7
Scope and Limitation of the Study 14
CHAPTER 2: REVIEW OF RELATED LITERATURE 16
2.1 Conceptual
Framework 16
2.1.1 Exchange
rate 16
2.1.2 Exchange
rate movement 16
2.1.3
Macroeconomic performance 22
2.1.4 Regional
economic integration 23
2.2 Theoretical
Literature Review 24
2.2.1 Optimum currency
area 24
2.2.2 Optimum
currency areas and monetary integration 26
2.3 Empirical Literature
Review 29
2.3.1 Exchange
rate movement and macroeconomic performance in WAMZ 29
2.3.2 Exchange
rate and macroeconomic performance in other countries
outside WAMZ 30
2.3.3 Impact of
exchange rate movement on economic growth 37
2.3.4 Exchange rate
co-movements 50
2.3.5 Exchange
rate behavior 52
2.3.6 Evidence on
optimum currency area 55
2.4 Gap in
Empirical Literature 61
CHAPTER
3: RESEARCH METHODOLOGY 62
3.1
Research Design 62
3.2
Linear Dependence and Feedback between the Structural Shocks 68
3.3
Model specification for the respective specific objective 69
3.3.1
Model specification for objective one 69
3.3.2
Model specification for objective two 71
3.3.3
Model specification for objective three 73
3.3.4
Model specification for objective four 73
3.4
Estimation Technique 74
3.5
Justification of the model 77
3.6
Data sources and properties 79
3.7
Software for Analysis 80
CHAPTER
4: PRESENTATION OF RESULTS AND INTERPRETATIONS 81
4.1
Descriptive statistics for variables in Panel VAR model for objective one 81
4.1.1 Panel unit root test for variables in
objective 1 83
4.2
Presentation of the Panel VAR model for objective I 85
4.2.2
Panel VAR stability test table for variables in objective 1 90
4.2.3
Panel VAR impulse response function 92
4.2.4 Panel VAR forecast-error variance decomposition 93
4.3
Presentation of model two results for objective II 95
4.3.1 Descriptive
statistics for variables in objective II 95
4.3.2
Panel unit root test for variables in objective II 97
4.3.3
Presentation of the panel random and fixed effect models for objective II 98
4.3.4 Testing for cross-sectional
dependence/contemporaneous correlation: using
Breusch-Pagan
LM test of independence 104
4.3.5 Heteroskedasticity test 104
4.4
Presentation of model three results for objective III 105
4.4.1 Descriptive statistics
for variables in objective III 105
4.4.2
Panel unit root test for variables in objective III 107
4.4.3
Presentation of the panel random and fixed effect models for objective III 108
4.4.4 Testing for cross-sectional
dependence/contemporaneous correlation: using
Breusch- Pagan LM test of independence 114
4.4.5 Heteroskedasticity
test 115
4.5
Presentation of model four results for objective IV 115
4.5.1 Descriptive statistics
for variables in objective IV 115
4.5.2
Panel unit root test for variables in objective IV 117
4.5.3
Presentation of the gravity model for objective IV 118
4.5.4 Heteroskedasticity
test 123
4.6 Evaluation of
Working Hypotheses 124
CHAPTER
5: SUMMARY OF FINDINGS, CONCLUSION AND POLICY RECOMMENDATIONS 127
5.1
Summary of Findings 127
5.2
Conclusion 131
5.3
Policy Recommendations 132
References 134
Appendix 151
LIST OF TABLES
1: Summary of
empirical studies on the proposed West African Monetary
Zone (WAMZ) 59
4.1:
Summary Statistics Results of Variables in Panel VAR model for Objective 1 82
4.1.1:
Panel unit root test result of variables of the model for objective 1 84
4.2.1:
Summary results of the panel VAR model for objective 1 85
4.2.2:
Summary results of the panel VAR stability test for variable in Objective 1 90
4.2.4:
Summary result of the panel VAR forecast-error variance decomposition
for objective one variable 94
4.3.1:
Summary statistics results of variables in model for objective 2 96
4.3.2:
Panel unit root test results of variables of the model for objective 2 97
4.3.3.1: Summary results of panel random
effect model (Dependent
Variable = lntrb) 99
4.3.3.2: Summary
results of fixed effect model (Dependent variable = lntrb) 100
4.3.3.3:
Summary results of the Hausman Test 101
4.3.4.1:
Summary Results of correlation of residuals 104
4.4.1:
Summary Statistics Results of variables of the model for objective 3 106
4.4.2:
Panel Unit Root Results of Variables of the model for objective 3 107
4.4.3.1:
Summary result of panel random effect model (Dependent
Variable = fer) 109
4.4.3.2:
Summary results of fixed effect model (Dependent variable = fer) 110
4.4.3.3:
Summary Results of the Hausman Test 111
4.4.4.1:
Summary results of correlation matrix of residuals 114
4.5.1:
Summary statistics results of variables of the model for objective 4 116
4.5.2:
Panel unit root test result of variables of the model for objective 4 117
4.5.3.1:
Summary results of panel gravity random effect model (Dependent
variable = opg) 4 118
4.5.3.2:
Summary results of gravity fixed effect model (Dependent Variable =opg) 119
4.5.3.3:
Summary results of the Hausman Test
120
LIST
OF FIGURES
2.1:
The Transmission Mechanism of Exchange rate Movement on Economic Growth 20
4.2.2:
PVAR stability Test Graph 91
4.2.3:
Panel VAR impulse response function of exchange rate vitality and response
of real gross domestic product in WAMZ 92
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND TO THE
STUDY
The
choice of the exchange rate regime and its movement are currently the subject
of ongoing empirical discussion with regard to macroeconomic results. The topic
has lately come up again because it is widely believed that the instabilities
in exchange rates were the main factor contributing to the global macroeconomic
performance issues. Hence, the previous years' experiments with new exchange
rate rules. Policies like the adoption of currency boards in Estonia and Hong
Kong, the creation of the European Economic and Monetary Union (EMU), and the
dollarization of El Salvador and Ecuador have all strengthened the argument
that some economies benefit most from stable exchange rate movement (Bailliu,
2003). Cruz-Rodriguez (2013) noted that there are generally three main ways to
choose between exchange rate regimes. This includes the economic performance
criterion, the ideal currency region criterion, and the currency crisis
criterion.
Following
the collapse of the Bretton Woods system of fixed exchange rates in the early
1970s, the wave of financial crises in the 1990s, and the introduction of the
euro in 1999, the choice of exchange rate regime has also become a topic of
ongoing discussion in international economics. This discussion has focused on
which exchange rate regimes are most appropriate for a particular country or
group of countries (Cruz-Rodriguez, 2013).
There are two basic reasons why this discussion has resurfaced. First,
it was widely believed that unsustainable exchange rate regimes contributed to
a string of economic crises, including the 1992 exchange rate mechanism (ERM)
crisis, the 1994–1995 Mexican peso crisis, the 1997–1998 Asian crisis, the
1999–2002 Argentine crisis, the 2008 global financial crisis, and the ongoing
euro crisis (Bailliu, 2003). (Agyapong & Adam, 2012).
Due
to this, some economists have hypothesized that only the two extreme types of
exchange rate regimes—a fixed exchange rate regime or a flexible exchange rate
regime—are likely to be sustainable in a world with growing international
capital mobility. A fixed exchange rate
may be the optimum exchange rate system for some nations, according to recent
developments such as the European Economic and Monetary Union (EMU),
dollarization in Ecuador and El Salvador, and currency boards in Hong Kong and
Estonia (Bailliu, 2003).
In
the case of West Africa, a variety of exchange rate strategies have also been
implemented to increase the ECOWAS's external competitiveness and hasten the
establishment of the region's unified currency. These policies, which imply price parity
across the various integrating countries, are largely based on the empirical
validity of the buying power parity theory. Because ECOWAS member nations have
both a fixed exchange rate regime and a floating exchange rate regime while
they work to execute full economic integration, people who subscribe to the
bipolar perspective consider West African nations as an interesting group.
Due
to convertibility at a set rate guaranteed by France, it is not unexpected that
the black market premium in the CFA zone is, on average, close to zero for the
whole duration and consistent across nations. The black market premium, on the
other hand, was consistently significant in non-CFA nations during the whole
time, showing a significant real exchange-rate mismatch. Morocco, Tunisia
(after 1975), and Mauritius (after 1985) stand out as notable instances where
exchange regulations have been somewhat loosened. The SSA nations with the
biggest concentrations of black market premiums, including Ghana, Nigeria, and
Tanzania, are where the misalignment is most visible.
Due
to convertibility at a set rate guaranteed by France, it is not unexpected that
the black market premium in the CFA zone is, on average, close to zero for the
whole duration and consistent across nations. The black market premium, on the
other hand, was consistently significant in non-CFA nations during the whole
time, showing a significant real exchange-rate mismatch. Morocco, Tunisia
(after 1975), and Mauritius (after 1985) stand out as notable instances where
exchange regulations have been somewhat loosened. The SSA nations with the
biggest concentrations of black market premiums, including Ghana, Nigeria, and
Tanzania, are where the misalignment is most visible. Since the end of the
1980s, exchange-rate policy reforms have been pursued in Africa, with a focus
on the necessity of an adequate exchange-rate strategy to reach a relative
price of tradeable that provides sufficient incentives for increasing export
production. To correct resource misallocation caused by parallel market premiums,
adjusting countries have taken specific actions supported by World Bank and IMF
programs. These actions include: a) harmonizing the official and parallel
market exchange rates; b) switching to a crawling peg regime where the currency
is devalued gradually over time; and c) reforming the allocation of foreign
exchange through a variety of measures. It is interesting to note that the West
African Clearing House (WACH), a multilateral payment system, was established
in 1975, immediately following the establishment of ECOWAS, in order to
facilitate the process of monetary integration throughout all of West Africa
and to provide settlement services among the central banks. In 1996, this
became the West African Monetary Agency (WAMA). The ECOWAS Monetary Cooperation
Programme (EMCP), a more extensive initiative, was started in 1987. The Accra Declaration, which was launched in
April 2000 by four ECOWAS countries who speak English—Ghana, Nigeria, Sierra
Leone, and Gambia—and one member who speaks French—Guinea—was intended to
create the second monetary zone in West Africa. Along with the eight-member
francophone West African Economic and Monetary Union (WAEMU), the Bamako Accord
of December 2000 established the West African Monetary Zone (WAMZ), the West
African Monetary Institute (WAMI), and the Stabilization and Cooperation Fund
(SCF). WAMI was established by this agreement to carry out all necessary tasks
leading to the establishment of the West African Central Bank (WACB) and the
introduction of a common currency (WAMI, 2002).
By January 2003, the five nations
had committed to adopting a single currency, and by January 2004, they had
committed to working to combine their planned monetary union with the WAEMU
(Asante and Masson, 2001). Later, in
February 2010, Cape Verde became an observer and Liberia became the sixth
member of the WAMZ.
The
WAMZ Forum of Finance Ministers decided in November 2002 to make it easier for
members to harmonize their monetary and fiscal policies by introducing two sets
of convergence criteria: four primary and six secondary. These standards, in
accordance with WAMI (2002), are as follows: The main standards I Achieve and
sustain price stability by recording end-of-period inflation rates in the
single digits by 2003 and 5% by 2004. (ii) Ensure a stable state of government
finances by keeping the budget deficit (excluding grants) as a percentage of
GDP at or below 4% from 2003 to 2005, (iii) During the years 2003 to 2005, keep
Central Bank funding of the government budget deficit as a percentage of tax
collections at 10 percent or below. (iv)
Keep adequate gross official foreign exchange reserves of at least three
months' worth of import coverage from 2003 to 2005. The additional criteria I
The prohibition of new domestic arrears and the payment of those that already
exist. (ii) A tax revenue to GDP ratio that is at least 20%. (iii) A wage bill
to tax revenue ratio of 35 percent or less; (iii) a public investment to tax
revenue ratio of 20 percent or more. Maintain a stable real exchange rate and a
real interest rate that is positive. While the secondary criterion would assure
budgetary convergence, the fundamental criteria would ensure that the economies
of the member states converge in the sense of having symmetric shocks.
1.1.1 GDP Growth in the
WAMZ
Economic
activity in the WAMZ remained robust in 2012; national economic growth rates
ranged from a minimum of 3.9% in Guinea to 15.2% in Sierra Leone. By country
the situation is as follows:
In
The Gambia, the real GDP growth rate
was 6.4% in 2012 after a decline of 4.9% in 2011, mainly due to the tertiary sector,
followed by the primary and secondary sectors Indeed, the tertiary sector grew
by 5.8% due to the good performance of the hotels and restaurants sub-sector as
well as communications contributed 3.5 percentage points to growth GDP in 2012.
The primary sector grew by 7.5% as a result of the 12.4% increase in
agricultural production against a decline of 45.7% in 2011, contributing 1.6
percentage point increase of GDP in 2012. The secondary sector posted a growth
of 6.6%, driven by all sub-sectors except electricity and water, which
contributed 0.9 percentage point to GDP growth in 2012
The
real GDP growth in Ghana, was 7.1%
in 2012 against 14.4% in 2011, driven mainly by the secondary and tertiary
sectors. Indeed, the secondary sector increased from 7.0% in 2012 against 41%
in 2011, as a result of oil production. At the tertiary level, which represents
50% of GDP, growth was 10.2% against 8.2% a year earlier due to the performance
of all sub-sectors. For the primary sector, the growth rate was 1.3% in 2012
vis-à-vis 0.8% in 2011, mainly as a result of the intensification of fertilizer
subsidy programme, the mechanization of agriculture and programme on
development of fishery.
Also,
in Guinea, the rate of real GDP
growth was 3.9% in 2012 as in 2011, driven by the performance of all sectors.
Indeed, the rate of growth in the primary sector was 3.8% due to the
performance recorded in all sub-sectors. At the secondary level, growth was
3.5% in 2012 compared to 4.3% the previous year, due to the recovery in production
and distribution of electricity, which has positively impacted the
manufacturing sub-sector. The tertiary sector experienced a growth rate of 3.3%
in 2012 compared to 3.2% the previous year. From the demand side, growth was
driven by all demand components.
Furthermore,
in Liberia, the real GDP growth was
8.7% in 2012 compared to 8.2% a year earlier, driven by the dynamism of the
secondary sector due to the growth in mining sub-sector which grew by 46.5% in
2012 after reaching 30.5% in 2011. This increase is related to the increased
production of gold, in spite of the decrease in diamond production. The primary
sector experienced an increase of 2.1% in 2012 against 3.7% a year earlier. The
tertiary sector grew by 5.4% in 2012 vis-à-vis 7.6% in 2011. Contributions to
GDP growth in 2012 were 0.8, 5.3 and 2.6 percentage points for the primary,
secondary and tertiary sectors, respectively.
Here
in Nigeria, the economic growth rate
was 6.5% in 2012 compared to 7.4% the previous year, driven mainly by the non-oil
sector which increased by 7.9% vis-a-vis 8.8% in 2011. However, the impact of
this increase was offset by the decline in production in the oil sector, which
experienced a decline of 0.9% in 2012 against a slight increase of 0.14% in
2011. The decline was not unconnected to oil pipeline vandalization. The
primary sector growth slowed in 2012 to 3.9% compared to 5.6% in 2011 due to
flooding in many parts of the country and security problems in the northern
part of the country. The secondary sector experienced an increase of 7.6% in
2012 compared to 7.5% a year earlier as a result of improvement in electricity
supply. Also, the tertiary sector experienced growth in all its sub-sectors.
More
so, in Sierra Leone, the real GDP
growth rate was 15.2% in 2012 vis-à-vis 6.0% in 2011 essentially due to mining
activities (iron ore in particular), supported by the strong performance of
other sectors. Indeed, the primary sector experienced an increase of 3.8% in
2012 compared to 4.9% in 2011 as a result of measures embarked upon to support
agricultural production. At the secondary level, due to mining, economic
activities increased by 127.6% in 2012 compared to 10.2% a year earlier. The
tertiary sector experienced an increase of 5.9% in 2012 vis-à-vis 6.6% a year
earlier which is attributable to the improved performance of all its
sub-sectors. Contributions of the sectors to GDP at factor cost were 2.0
percentage points for the primary, 10.9 percentage points for secondary and 2.1
points for the tertiary sectors.
The
major benefits of exchange rate stability are the reduction in transaction
costs, economies of international reserve, the elimination of exchange rate
risk and the region-wide price harmonization. On the other hand, the costs of
an exchange rate instability are related to the loss of sovereignty over
monetary and exchange rate policy, especially in the case of asymmetry shocks
that make the same monetary policy inappropriate for all member countries of an
economic union. Indeed, in economic integration, member countries lose
unilateral control over monetary policy instruments and exchange rate policy
that may be crucial in dealing with country specific macroeconomic shocks (ECA,
2012).
Exchange-rate
policy plays a crucial role in providing increased incentives for exporting.
All countries which have been successful in promoting manufactured exports
experienced real exchange-rate (RER) depreciation, leading to a significant
increase in the domestic relative price of tradeable to non-tradeable. The
responsiveness of exports of goods and services to real-exchange-rate-related
price incentives has been demonstrated in a panel of 16 Sub-Saharan African
countries by Balassa (1990). Moreover, inconsistent macroeconomic, trade, and
exchange-rate policies increase the variability of the real exchange rate. In
turn, higher RER volatility sends conflicting signals to economic agents and
increases uncertainty of long-term investments as well as of the profitability
of producing tradable goods. The negative influence of RER variability on
economic performance of SSA countries has been demonstrated by Ghura and
Grennes (1993).
1.2 STATEMENT OF THE
PROBLEM
The
relative effectiveness of exchange rate policy in terms of whether real
exchange rate deprecation or appreciation improves macroeconomic performance in
SSA has been a subject of intense debate as there is not yet consensus in
extant studies. For example, Ndlela and Ndlela (2002) examined real exchange
rate and output elasticities of import and exports of eight Southern African
economies (Botswana, Lesotho, Malawi, Mauritius, South Africa, Swaziland,
Zambia, and Zimbabwe). The authors found that exchange rate policy has not has
not played significant role as a trade facilitation instrument in the SADC
regional economies.
One
of the reasons alluded by the authors was the distorted macroeconomic and
structural macroeconomic fundamental. It was also found that the real exchange
rate elasticities were generally low, which indicate that though there is
considerable evidence that the real exchange rates affect macroeconomic
performances in the expected directions, the results were in most cases quite
pessimistic regarding the size and effectiveness of the underlying
elasticities. They concluded that macroeconomic performances and exchange rate
policy implementation in regional economies is highly constrained by the
underlying structural features of the economies which made import substitution
difficult while exhibiting inelastic export response both on the demand and
supply sides (Alege and Osabuohien, 2011).
A
number of African countries have been obliged to undertake substantial
exchange-rate policy reform during the 1980s and the 1990s. The macroeconomic
background against which these reforms were undertaken was characterised by
rapid demand expansion during the 1970s, due to the boom in most primary
commodities prices, and by failure to adjust to declining terms of trade during
the 1980s successfully. Rather than attempt to stabilize the economy, most SSA
governments responded to the deteriorating economic environment by increasing
trade protection and exchange controls in order to avoid balance-of-payments
crisis, while maintaining the unsustainable trend in aggregate demand. The
worsening macroeconomic imbalances led to capital flight, to substantial real
exchange-rate overvaluation, and to the emergence of parallel markets for
foreign exchange.
In
addition, the need for economic integration is on the increase because payments
for international transactions necessarily involve exchange of currencies and
which often lead to exchange rate risks. Despite the small size of ECOWAS
economies, the region is characterized by a remarkable multiplicity of
currencies where fifteen member countries of ECOWAS use over 10 currencies and
most of them are not convertible (Yehoue, 2005). The lack of convertibility
contributes to the high costs of transactions in the sub-regions, since it
costs money and time to exchange one currency for another. However, even where
currencies are convertible, exchange rate variability constitutes another sets
of risks that impede inter-regional trade. Hence, economic integration becomes
important in addressing the problems of exchange rate regimes and variability
that often impede trade flows among the ECOWAS countries.
However,
an export-promoting exchange-rate policy cannot be sustained unless monetary
and fiscal policies are fully consistent with it. In many developing countries
mismanagement of macroeconomic and trade policies led to real exchange-rate
misalignment, that is, to a substantially overvalued RER with respect to its
market clearing level. Real exchange-rate misalignment is damaging to economic
performance as it decreases the profitability of production of tradeables. All
successful East and Southeast Asian countries have kept the RER close to its
market clearing level, while Sub-Saharan Africa and Latin American countries
experienced serious RER overvaluation. The damaging influence of RER
misalignment has been shown by Edwards (1989), as well as by Cottani, Cavallo,
and Khan (1990) for various groups of developing countries. Ghura and Grennes
(1993) showed a negative influence of RER misalignment on total exports for a
panel of 33 SSA countries.
Moreover,
inconsistent macroeconomic, trade, and exchange-rate policies increase the
variability of the real exchange rate. In turn, higher RER volatility sends
conflicting signals to economic agents and increases uncertainty of long-term
investments as well as of the profitability of producing tradable goods. The
negative influence of RER variability on economic performance of SSA countries
has been demonstrated by Ghura and Grennes (1993). Apart from contributing to
the academic literature on monetary integration in West Africa, the approach
used in this study adds value to the previous studies in West Africa by
measuring the level of exchange rate movement and stability achieved by the
participating countries in terms of their response to common shocks. The
methodologies used in the previous studies do not allow for the direct
measurement of supply, demand and monetary shocks to the economies of the
individual countries and their response to common shocks. This will also inform
policy on the adoption of the single currency, the eco, in the zone and also to
have an idea of how the economies of the zone converge ex-ante or will converge
ex-post after the introduction of the eco.
More
so, given the high dependence of the WAMZ member countries on foreign exchange,
a full-blown monetary integration is imperative but has been dragged in the
glare of exchange rate risk. One of the main prerequisites for the West African
Monetary Zone (WAMZ) to take off is to achieve convergence in macroeconomic
variables amongst member countries. According to Seck (2014), the ability of
the WAMZ countries to meet the convergence measures seems elusive. Considering
the failure of the WAMZ to achieve convergence in exchange rates and other
macroeconomic fundamentals since its inception, makes the study of exchange
rate movements a very relevant undertaking for policy-making in the sub-region
(see Adam, Agyapong, & Gyamfi, 2012; Agyapong, & Adam, 2012; Seck,
2014; Tweneboah, Agyapong, & Frimpong, 2016).
Most
empirical studies have focused on developed countries and have found a
conflicting results. This study goes beyond the existing literature by
examining the exchange rate movement in all the WAMZ member countries. It
employs methodologies used elsewhere, through both a panel setting (considering
WAMZ as one entity or region) and time series techniques (considering the WAMZ
member countries individually). It provides a more complete analysis by
estimating the exchange rate movement and macroeconomic performances in the
West African Monetary Zone (WAMZ). To the best of this study’s knowledge, there
has not been any single study yet that synthesized panel VAR, panel fixed
effect, and gravity model techniques in the WAMZ region. To this end, the study
would strive to provide answers to the following research questions.
1.3 RESEARCH QUESTIONS
1. What
is the effect of exchange rate volatility on real gross domestic product in
WAMZ member countries?
2. What
is the effect of exchange rate revaluation on trade balance in WAMZ member
countries?
3. What
is the effect of exchange rate devaluation on gross official foreign exchange
reserves in WAMZ member countries?
4. What
is the effect of real exchange rate on output growth in WAMZ member countries?
1.4 OBJECTIVES OF THE
STUDY
The
broad objective of the study is to analyse the effect of exchange rate movement
on macroeconomic performance in West African Monetary Zone (WAMZ). However, the
specific objectives are to:
1. investigate
the effect of exchange rate volatility on real gross domestic product in WAMZ
member countries.
2. analyse the effect of exchange
rate revaluation on trade balance in WAMZ member countries.
3. ascertain
the effect of exchange rate devaluation on gross official foreign exchange
reserves in WAMZ member countries.
4. determine
the effect of real exchange rate on output growth in WAMZ member countries.
1.5
HYPOTHESES
OF THE STUDY
Ho1:
Exchange rate volatility has no significant effect on real gross domestic
product in
WAMZ member countries.
Ho2:
Exchange rate revaluation has no significant effect on trade balance in WAMZ
member countries.
Ho3:
Exchange rate devaluation has no significant effect on gross official foreign
exchange
reserves in WAMZ member countries.
Ho4:
Real exchange rate has no significant effect on output growth in WAMZ member
countries.
1.6 SIGNIFICANCE OF THE
STUDY
As
a developing and potentially emerging sub-region, WAMZ member countries have
immense potential for better macroeconomic performances in both the short-run
and long-run than it is currently recording. The need for the macroeconomic
performance via exchange rate movement cannot be overemphasized. This work
seeks to provide a clear understanding for policy makers on how the WAMZ
economies will be shaped in future. Thus, the key stakeholders to benefit from
this study are, but not limited to; central bank authorities of WAMZ member
states, debt management offices of WAMZ member states, the West African
Monetary Institute (WAMI), and heads of state of WAMZ.
Among
others, it is important to look at this study in the context of the fact that,
WAMZ countries have already learnt the important lessons of the debt and
financial crises of the 1970s, 80s and 90s. WAMZ economies learnt through
bitter experience, the importance of sound macroeconomic management, and would
have to appreciate that, robust and stable exchange rate are needed to work in
partnership, as a panacea for growth and other macroeconomic performances.
Essentially stable exchange rate movement has the capacity to indicate which
aspect of the economic characteristics should be addressed to improve growth in
the WAMZ economies. Thus the results of this study are expected to give
appropriate policy recommendations designed to increase the macroeconomic
performances by identifying key characteristics anchored on the region‘s
potentials. An attempt is noble therefore, to carry out a research of this
scale on exchange rate movement of the WAMZ economies to forestall impending
crises, in order to propel and sustain growth levels in the future beyond the
conventional wisdom so as to assume the dominant players in the world economy.
Thus, the understanding of the exchange rate movement which previous studies in
Sub-Sahara Africa neglected is pertinent and could enrich the available policy
options for policy makers.
Hence,
the outcome of the study could provide a policy framework for WAMZ member countries. The study will also contribute to the existing literature on exchange
rate movement and how best to reduce exchange
rate volatility. Thus, the study
findings could be valuable to the governments of WAMZ member countries, knowing
the effect of exchange rate movement on macroeconomic performance in the WAMZ member countries. The relevance
of the outcome of the study could be extended to benefit other sub-regional
economies as a comparative study, then to researchers and students.
Additionally, the study would be beneficial to the associates in academic
sphere by narrowing the knowledge fissure on the effect of exchange rate
movement on macroeconomic performance in
WAMZ member countries.
1.7 SCOPE AND LIMITATION
OF THE STUDY
In
terms of coverage, the study covered the period between 1980 and 2020 using
panel and gravity models with secondary data. The coverage is chosen owing to
the availability of data. This study
proposes to examine the effect of exchange rate movement on
macroeconomic performance in WAMZ member countries. However, considering the core objective of the study and as a caveat,
this work did not go beyond investigating the effect of exchange rate
movement on macroeconomic performance in WAMZ member countries, but to bring to the fore the
deserted aspect of previous studies in the sub-region, and to refine the
understanding of exchange rate movement and enrich the available policy options
for policy makers. The study is limited to the six WAMZ member countries
(Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone) with the intention
to assess the level and degree of macroeconomic performance in WAMZ member
countries. The explanatory variables
included in the study are: real gross domestic product, trade balance, gross
foreign exchange rate reserve and output growth. The explanatory variables considered
in the study are: exchange rate volatility, foreign direct investment,
interest rate, exchange rate
revaluation, exchange rate devaluation, trade openness, gross fixed
capital formation and real exchange rate. However macroeconomic performance were proxied with real gross domestic product, trade balance, gross
foreign exchange rate reserve and output growth in the respective four specific
objectives.
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