Impact of Exchange Rate on Selected Macroeconomic Variables: A case study of West African Monetary Zone
Keywords:exchange rate, impulse response function, variance decomposition
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 declarationâ€™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.
Balogun, E.D., (2007). Monetary Policy and Economic Performance of West African Monetary Zone Countries, Munich Personal RePECs Archive. Http: //mpra.ub.uni-muenchen.de/4308
Balogun, E.D., (2008). An Alternative Reconsideration of Macroeconomic Convergence Criteria for West African Monetary Zone, Munch Personal RePECs Archive. Http: //mpra.ub.uni-muenchen.de/4308/
Bastian, M.Zama., Nawalape, S. Cooray,(2007). Economic Analysis of the Exchange Rate Channel and Monetary Policy Rule: The case of Indonesia, GSIR working Paper, International University of Japan,gsir.iuj.ac.jp
Blanchard and Watson, (1986). Are business all like? In R.J. Gordon (Ed.), American Business Cycle, University of Chicago Press, Chicago pp.123-156.
Blanchard, O.J. and Quah, I.D.,(1989). The Dynamic Effects of Aggregate Demand and Supply Disturbances, American Economic Review, 79, 6555-1164
Chuka, A. Chuka, (2009). Measuring the effects of Monetary Policy Innovations in Nigeria: A Structural Vector Autoregressive (SVAR) Approach, African Journal of Accounting, Economics, Finance and Banking Research, vol.5, No.5
Claudio, S., (2003). Monetary Policy, Real Exchange Rate, and The Current Account in a small open economy, working papers of Central Bank of Chile. www.bcentral.cl/eng/stdpub/studies/working paper
David, B. and Santigie, M. K., (2010). Exchange Rate and Monetary Dynamics in Sierra Leone, Journal of Monetary and Economic Integration. Vol.9.No.2
Faik, K. and Douglas, W. Mcmillin.,(1998). Monetary Shocks, the Exchange Rate and Trade, Journal of International Money and Finance.
Girardin and Nicholas., (2001). New Transmission Mechanisms and Instruments of Monetary Policy at Near Zero Interest Rates: The case of Japan in the late 90's, paper presented at the Oxford 2001 meeting of CEPR European Network on the Japanese Economy.
Jimoh, A.,( 2004). The monetary Policy Approach to Exchange Rate Determination: Evidence from Nigeria, Journal of Economic Corporation.
Kim, S., 2003. Monetary Policy, Foreign Exchange Intervention and The Exchange Rate in a unifying Framework, Journal of International economics, 60,355-386
Kim, S. and Roubin, N., (2008). Exchange Rate Anomalies in the Industrial Countries: a solution with a structural VAR Approach, Journal of Monetary Economics, 45, 561-586.
Marcio, H., (2005). Monetary and Exchange Rate Policy in Brazil after inflation Targeting, Economia International Financas Publicas
Mundell, Robert A., (1962). The Approach Use of Monetary and fiscal Policy for Internal and External Stability, Staff Papers Vol.9, No.70-79
Siok, Kun Sek., (2009). Interactions between Monetary Policy and Exchange Rate in Inflation Targeting Emerging Countries: The case of Three East Asian Countries, International Journal of Economics and Finance.www.ccsenet.org/journal
Sushanta, M., (2010). Macroeconomic Shocks, Monetary Policy and Implicit Exchange rate targeting in India, Paper presented at the Allied Social Sciences Associations Annual Meeting in Atlanta, U.S.A.
Vincente, G., (1975). Monetary and Exchange Rate Policies in a small open economy, International monetary fund Staff Papers