Exchange Rate Volatility and Domestic Investment: Evidence from Twelve ECOWAS Countries

Abstract

This paper examines the dynamic relationship between exchange rate volatility and domestic investment for twelve ECOWAS countries over the period 1986-2017. We employed the ARDL bound testing approach for co-integration and error correction modeling techniques by incorporating real GDP, real interest rate, real exchange rate, and exchange rate volatility as essential drivers of domestic investment. The results of the ARDL Bound test confirm the existence of long-run relationship among the variables in the selected countries. Furthermore, the findings show that exchange rate volatility is negative and statistically significant only in the case of Nigeria, Sierra Leone, Guinea, Gambia, Cote d’lvoire, Togo, and Liberia but insignificant in Cabo Verde, and Senegal. However, contrary to many theoretical predictions and hypotheses, exchange rate volatility is found to be positive but insignificant in Ghana, Benin, and Burkina Faso.