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.
Description
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