SENSITIVITY OF MACROECONOMIC VARIABLES TO EXCHANGE RATE SHOCK IN NIGERIA AND SOUTH AFRICA: A STRUCTURAL VECTOR AUTO REGRESSION APPROACH

Adeola Oluwakemi Adejayan, Michael Ojo Oke

Abstract


This study investigates the sensitivity of macroeconomic variables to exchange rate shocks in Nigeria and South Africa between 1982 and 2018. Specifically, the study investigated the response of Foreign Direct Investment (FDI), Gross Domestic Product growth rate (GDPGR), Import rate (IMPORTR), Export rate (EXPORTR) and Inflation rate (INFR) to exchange rate shock in these Countries. The data used for analysis is secondary by nature and was obtained from the World Development Bank Indicators. The estimation technique employed was structural Vector autoregression (SVAR), impulse response function (IRF), and variance decomposition function (VDF). The Structural Var result revealed that exchange rate shock had negative effect on FDI in the countries but insignificant. The result on GDPGR revealed that the effect is only positive in South Africa but insignificant in both economies. For IMPORTR and EXPORTR, the effect is positive in all the zones but significant only in Nigeria. For INFR, the effect is significantly positive in South Africa at 5% significant level but insignificantly negative in Nigeria. Impulse response result revealed that in Nigeria and South Africa, all the variables were negatively sensitive to exchange rate shock but temporal except INFR that was positive and permanent in South Africa. However, the variance decomposition function for the zones revealed that apart from own shock, exchange rate shock had relatively high contributions to variations in IMPORTR, EXPORTR, and INFR in Nigeria. Also, in South Africa, exchange rate shock contributed the largest variations in EXPORTR and INFR. Based on the findings, this study concludes that the macroeconomic variables of the countries are sensitive to exchange rate shock more in the short run but undecided in the long run. Moreover, the permanent response of INFR to exchange rate shock in South Africa calls for serious attention by the regulatory authorities in this economy. Therefore, this study recommends that conscientious effort be made by policy makers in ensuring exchange rate management in the zones for better performance of the macroeconomic variables.

JEL: F31, F41, N1, N10, N17

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Keywords


exchange rate shock, macroeconomic variables, sensitivity, structural VAR

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DOI: http://dx.doi.org/10.46827/ejefr.v5i3.1201

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