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  • Introduction In the midst of the detrimental

    2018-11-12

    Introduction In the midst of the with others detrimental effects of unstable movement in exchange rate, the negative penalties of exchange rate volatility are of great concern. High uncertainty of exchange rate makes expectations over the future price level more uncertain. In a country where the economy depends solely on importation of raw materials like most African countries, exchange rate volatility induces risk premia for long-term arrangements, raises costs of production, reduces trade, causes unanticipated redistribution of wealth and leads to fluctuation in the real economy with adverse effects on unemployment rate, poverty rate, deficit balance of payment position and with others in the growth of consumption. Also, uncertainty of exchange rate causes high risk in investment decision which threaten the performance of macroeconomic variables (Dedola, 2002; Mendoza, 2005; Omojimite & Akpokodje, 2010). Empirical literatures have abounded on the relationship between exchange rate volatility and macroeconomic variables; the popular and most cited among these studies in developing countries focused on the effects of exchange rate volatility on foreign direct investment (Lloyd & osinubi, 2009); real GDP (Azeez, Kolapo, & Ajayi, 2012); performance of manufacturing sector (David, Umeh, & Ameh, 2010); and the relationship with stock price fluctuations and the lending behavior of banks (Mbutor, 2010). Also among the industrialized countries, studies only focused on credit channel in emerging markets (Caballero & Krishnamurthy, 2005); foreign consumption (Dedola, 2002); monetary policy issues (Al Samara, 2009; Duarte & Obstfeld, 2008; Gali & Monacelli, 2002; Omojimite & Akpokodje, 2010) and oil prices (Rickne, 2009). However, issues on whether or not the fluctuations in exchange rate affects private consumption has not been documented in the midst of studies that revolve round the relationship between exchange rate volatility and macroeconomic performance in Africa. Meanwhile, economists have argued that private consumption contributes not less than 70% to the composition of GDP of a country (Mankiw, 2012). For instance, over the decades – private consumption contributes an average of 60% to GDP in African countries like Nigeria, South Africa, Ghana, Tunisia, Cameroon, Gambia, Togo and a host of others (World Development Indicator, 2014). Also, most countries in Africa rely solely on importation of goods for survival especially the raw materials that are used by the domestic industries. The importation of goods is subjected to the behaviour of foreign exchange rate market. Thus, a slight change in exchange rate would affect the price of the domestic goods and this may determine the individual consumption level since the production of these goods are directly influenced by the cost of exchange rate. Hence, the need to examine the relationship between exchange rate volatility and private consumption becomes imperative. It is therefore obvious that there is scarcity on the research on exchange rate volatility – private consumption nexus. Hence, this study aims at providing a link between exchange rate volatility and private consumption in Africa, using annual data of 19 sub-Saharan African countries covering the period of 16 years from 1999 to 2014 using system generalized method of moments (SGMM), two-step robust estimator. This method is employed because in a well-known dynamic panel models the usual fixed effects estimator is unreliable when the time span (T) is smaller than the cross-sectional unit (n) (Nickell, 1981). Consequently, the instrumental variable (IV) estimator (Anderson & Hsiao, 1982) and generalized method of moments (GMM) estimator (Arellano & Bond, 1991) are widely used. However, the estimators from these models also suffer from a weak instrument problem when the dynamic panel autoregressive coefficient (δ) approaches unit (Blundell & Bond, 1998). When δ=1, the moment conditions are totally inappropriate for the true parameter δ, and the nature of the behaviour of the estimator depends on T. When T is small, the estimators are asymptotically random and when T is large, the unweighted GMM estimator may be inconsistent and the efficient two-step estimator may behave in a nonstandard way. To avoid these problems, the proposed system GMM two-step robust estimator procedure by Arellano and Bover (1995); and Blundell and Bond (1998) is employed in this paper. This approach yields reliable and consistent estimators for all δ values; it has virtually no bias; totally avoids the usual weak instrument problem; supports asymptotically valid Gaussian inference even with highly persistent panel data and free of initial conditions on level. In addition, the limit distribution is continuous as the autoregressive coefficient passes through unity; the rate of convergence is the same for stationary and nonstationary panels; differencing transformations essentially eliminate dependence on level of initial conditions; and there are no restrictions on the number of the cross-sectional units (n) and the time span (T) other than the simple requirement that nT→∞. Thus, neither large T nor large n is required for the limit theory to hold.