Exchange Rate Dynamics and Growth Trajectories in Sub‐Saharan Africa: A Longitudinal Panel Study (1995–2023)

Abstract

This study investigates the impact of real exchange rate levels and volatility on economic growth across 26 Sub‐Saharan African nations from 1995 to 2023, using a balanced panel with fixed effects and system GMM estimators. Excluding countries where GARCH(1,1) models failed to converge, the analysis employs extensive robustness checks including alternative volatility measures, external instruments, and cross‐sectional dependence tests. The findings reveal that real appreciation and heightened volatility significantly impede growth: a 10% appreciation reduces annual GDP growth by 0.6–0.8 percentage points, while a one‐standard‐deviation rise in volatility lowers it by approximately 0.4 percentage points ( p  < 0.05). Investment and trade openness promote growth, whereas inflation exerts a strong negative effect. These results validate the competitiveness, uncertainty, and asymmetric channels. Policy implications emphasize maintaining competitive and stable real exchange rates through managed floats with active sterilized intervention. The analysis confirms that monetary policy effectiveness and reserve buffers are conditional on financial depth, suggesting policymakers must carefully balance competitiveness with stability through refined monetary policy and targeted foreign exchange interventions.