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.