Responsiveness of GDP toward changes in inflation and exchange rate in the CFA zone

Abstract

This paper examines the responsiveness of GDP toward changes in inflation and exchange rate in the CFA zone, to understand how each of these variables react to each over if  any change occur. The study employed panel unit root tests to establish stationarity of the variables. The study utilized the econometric frameworks of GMM style panel VAR model to investigate the phenomenon. Panel granger causality test, impulse response graph and variance error decomposition were estimated.

The results from panel VAR estimates shows that both exchange rate and inflation have significant and positive impacts on GDP growth at 10% significant level. In addition, the granger causality results shows that there is bidirectional causality between inflation and GDP growth but in negative direction for GDP and positive direction for inflation. Finally, the impulse response graph shows that GDP react positively to exchange rate in the first few years and become zero in period 4 to 10. Similarly, the result shows that one standard deviation shock in inflation lead to positive response to GDP growth for all the period used in the study with the maximum impacts felt in the first few years.

Keywords: GDP, CFA zone, Exchange rate, Inflation, Economic growth, Panel VAR

DOI: 10.7176/JESD/15-9-03

Publication date: November 30th 2024