Drivers and impact of Financial Development on Exchange Rate Volatility in Sub-Saharan Africa

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Date
September, 2018
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Abstract
The role of financial development in promoting economic growth is well known among economists. Thus, it is not surprising that financial market development has engaged the attention of researchers and policymakers. While policymakers continue to depend on researchers for ideas to deepen the financial market, much of the studies on this area tend to be dominated by the impact of financial development on other variables with less on its drivers in sub-Saharan Africa. Other scholars also recognized the fact that, literature is inconclusive on the drivers of real exchange rate uncertainty. Therefore, the goal of this study is to investigate the drivers and impact of financial development on exchange rate volatility in SSA. Two sets of panel data were compiled for the study. The first panel comprises 17 SSA countries over the period 1996 – 2015. The second panel covers 14 SSA countries for the period 1980 – 2015. Data for the study were gleaned from the World Development Indicators (WDI) and the Worldwide Governance Indicators (WGI) databases. We employ the Generalized Autoregressive Conditional Heteroscedasticity (GARCH, 1:1) in the estimation of volatility and subsequently use system dynamic Generalized Methods of Moment (GMM) in our analysis. The results indicate that output growth, inflation, trade openness and institutional quality all matter for the depth of the financial sector. On the finance – exchange rate volatility nexus, we found an inverse relationship between the two. The study also uncovers a linear relationship between financial development and real exchange rate volatility. Further, the evidence shows that the finance – exchange rate volatility nexus is insensitive to the measurement of financial development. It is recommended that policy makers in SSA should put in place measures to grow their economies and deepen the financial systems since this could reduce the volatility of the exchange rate.
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This dissertation is submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology in partial fulfilment of the requirements for the award of Master of Science Degree in Economics (Money, Banking and Finance).
Keywords
Drivers, impact of Financial Development,, Drivers, imp Exchange Rate Volatility, Drivers, impact of Financial Sub-Saharan Africa
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