Effective Real Exchange Rate Volatility and Economic Growth in Sub-Saharan Africa : Evidence from Panel Unit Root and Cointegration Tests

In this paper, we investigate the long-run relationship between effective real exchange rate volatility and economic growth in 15 Sub-Saharan African (SSA) countries using panel unit root and cointegration tests over the period 1980 to 2004. In addition, we use fully modified OLS (FMOLS), developed by Pedroni (2000), to estimate the longrun relationship. We find that real exchange rate volatility negatively affects economic growth when the ratio of domestic credit to GDP is below the threshold value, which is 57%. Thus, the less financially developed an economy is, the more adversely it is affected by the volatility of effective real exchange rate. In this respect, debate around the reforms of financial system and the choice of exchange rate regime consistent with the financial development in the region re-emerges. These reforms include the improvement of credit policy and the development of financial infrastructure like financial instruments, financial regulation and stock exchange, among others