Empirical analysis of exchange rate volatility, inflation, and economic growth: Evidence from the SADC

In this study, the relationship between exchange rate volatility, inflation and economic growth in 13 selected countries of South African Development Countries (SADC) is examined. Specifically, the study focused on the interactions and differential effects of exchange rate volatility and inflation on the economic growth in that region for the period 2000 to 2017. Doing this presents an avenue for policy makers to understand whether volatility in exchange rate and inflation have complimentary effects on economic growth or not. The generalized autoregressive conditional heeroskedasticity (GARCH) (1, 1) model was employed to generate exchange rate volatility during this period and through the Hausman test, the Pooled Mean Group estimator of the Panel Autoregressive Distributed Lag was considered the most appropriate estimation technique. The result of the study showed that exchange rate volatility has a negative and significant influence on economic growth while inflation exerts a positive and significant effect on economic growth during the period under review. The interaction of exchange rate and inflation had, a negative and significant effect on economic growth as shown by the study. This is an indication that both variables have no complimentary effects on the macroeconomic performance of the 13 selected countries under review. A combination of a realistic exchange rate and oil price policies is recommended for adoption as policy by the governments of the community if sustainable macroeconomic performance is to be achieved. Not only that, importation of goods that can be produced locally should be minimized while encouraging the production of local consumables in large quantity and quality, so as to stem down inflation within the region.