Impact of Exchange Rate on Selected Macroeconomic Variables: A case study of West African Monetary Zone

rahman olanrewaju raji

Abstract


The study takes a cursory look at reaction of macroeconomic variables due to exchange rate shocks of four selected WAMZ countries in order to assess the level of macroeconomic convergence in the zone between the declaration’s year of WAMZ, 2000 and 2010 using Structural VAR country by county.

It was observed that monetary policy and money supply attained their co-integrating equilibrium in Gambia, Ghana and Nigeria while exchange rate attained co-integrating equilibrium in Gambia and Ghana within two quarters. The growth rate reacted positively on exchange rate but the magnitudes of reactions were not strongly up to expectation among the countries. The contribution of exchange rate depreciations to money supply and inflation is much in Sierra Leone when compared with other economies and more surprisingly, the past exchange rate influenced the current exchange rate strongly in Sierra Leone but moderately in other economies in the zone. Interestingly, Ghana economy happened to be a distinctive economy in the zone in term of selected variables reaction to exchange rate depreciation.

For the zone to establish currency union, three most promising countries are Gambia, Ghana and Nigeria due to symmetrical alignment exhibited in some macroeconomic parameters, although the synchronizations were not strong but moderate among the promising nations.


Keywords


exchange rate, impulse response function, variance decomposition

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References


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