Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264213 
Year of Publication: 
2012
Series/Report no.: 
WAMI Occasional Paper Series No. 2
Publisher: 
West African Monetary Institute (WAMI), Accra
Abstract: 
The study investigates the effect of changes in the exchange rate on output growth and inflation in the WAMZ economies. It formulates an open-economy general equilibrium model which highlights the interrelationships among real GDP growth, inflation, exchange rate depreciation/ appreciation and money supply growth. Employing quarterly data series for the period 1981Q1 to 2010Q4 for all countries except Ghana (1983Q2 to 2010Q4) and Guinea (1989Q1 to 2010Q4), the study uses the vector autoregressive (VAR) model to estimate the impulse response functions and variance decompositions for inflation and output in order to determine how inflation and output respond to changes in the exchange rate, and what proportion of inflation and output variance can be explained by the exchange rate. The results of the study suggest that exchange rate had significant impact on inflation in all the Member States. The results reveal a negative relationship between real exchange rate and real GDP growth for both Liberia and Sierra Leone, implying that depreciation of the real exchange rates in these countries could lead to output growth. However, the impact of exchange rates on output in The Gambia, Ghana, Guinea and Nigeria though positive, remained weak, which may be partly due to supply side factors as evident from the results. Overall, the key message of the study was that real exchange rate depreciation generates inflationary pressures and impact significantly on output growth. In addition, inflation and growth in the WAMZ are partly driven by structural factors. The policy implication arising from this study is that WAMZ Member States should continue to implement prudent fiscal and monetary policies to achieve and sustain price stability. Monetary, exchange rate and real sector policies should be well knitted to ensure macroeconomic stability. In this regard, Member States should implement sectoral and structural policies that promote food production in order to dampen inflationary pressures
Subjects: 
Exchange rate
Inflation
Real GDP
VAR model
Impulse response
WAMZ countries
quarterly data
Document Type: 
Research Report

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.