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  • s ibuprofen These countries are selected based

    2018-11-12

    These countries are selected based on data availability on private consumption and exchange rate. This paper contributes to existing literature by exploring the effect of exchange rate volatility on private consumption in sub-Saharan African countries. The study focuses on only sub-Saharan African countries because exchange rate volatility has remained their major challenges for over a decade; and this has adversely affected the performance of macroeconomic variables (Dedola, 2002). The study also applies a novel measure of exchange rate volatility- the conditional variance of exchange rate level, constructed from the GARCH (1, 1) model. Conditional variance is the true measure of volatility about a variable given a model and information set. The unconditional measure by standard deviation used in the previous studies as the measure of exchange rate volatility does not adequately measures the uncertainty of exchange rate (see Brooks (2008)). Finally, it s ibuprofen enables policy makers to take proactive measures against any adverse effect on private consumption that might emanate from fluctuations in exchange rate as experienced in some countries among OECD countries. The remaining of the paper is organized as follows. Section 2 presents a review of relevant empirical literature. Section 3 entails the methodology. Section 4 discusses the empirical results while Section 5 concludes.
    Review of empirical literature Although, there are scanty literature on the relationship between exchange rate volatility and private consumption but studies have evolved round most of the macroeconomic variables except private consumption in Sub-Saharan African countries. Some of these studies are reviewed here. Aghion, Bacchetta, Rancière, and Rogoff (2009) examined the effect of volatility on real activity given preference to financial development using monetary growth model. The study found that there was little or insignificant relationship between exchange rate volatility and real activity. It was therefore concluded that exchange rate uncertainty enhanced the negative investment effects of domestic credit market constraints. Azeez, Kolapo, and Ajayi (2012) evaluated the effect of exchange rate volatility on Nigerian economy. This study demonstrated that exchange rate volatility in Nigeria discouraged exportation and encouraged importation to meet the need of vast population in the country using simple regression technique. Also, the study did not use appropriate technique to measure the volatility of exchange rate. Further, similar study was conducted on 83 trading countries using two-step dynamic panel system GMM with emphasizes on the role of financial development by Aghion Bacchetta, Rancière, and Rogoff (2009). They argued that the significant relationship between exchange rate volatility and productivity depends on the country׳s level of financial development. Thus, the study concluded that exchange rate volatility reduced the negative investment effects of domestic credit market constraints. Al Samara (2009) examined the determinants of real exchange rate volatility in the Syrian economy using ARCH model. The study found that three variables determined the exchange rate volatility in the country: the equilibrium level of exchange rate itself, the decline in oil production and the challenges faced by the economy to allow real exchange rate converged to its equilibrium level. Caballero and Krishnamurthy (2005) examined the theoretical relationship between exchange rate and the credit channel in emerging markets. They argued that firms in emerging market were exposed to unadorned frictions and credit constraints. This was increased by sudden halt of capital flow. The study used monetary policy instruments and realized that the expansionary effect of monetary policy vanished during stick external crises by raises the value of domestic collateral but increases exchange rate depreciate; this had little effect on aggregate activity. The study concluded that there is a dynamic linkage between monetary policy and sudden stop of capital flow via exchange rate volatility. Also, study by Duarte and Obstfeld (2008) investigated the relationship between monetary policy and exchange rate flexibility in the open economy by revisiting the sticky-price pricing-to-market model of Devereux and Engel (2003) in which fixed exchange rates are optimal even in the face of country-specific nonmonetary shocks. Their results showed that Devereux–Engle model׳s prediction of international consumption levels were perfectly synchronized under flexible prices while the modification of the model produced non-synchronous consumption movement under the fixed exchange rate prescription.