On the Macroeconomic Conditions of West African Economies to External Uncertainty Shocks

Abstract

This study provides a detailed investigation of the time–frequency and frequency-domain analysis of the interconnectedness of country-level macroeconomic variables. Hence, the wavelet techniques—vector wavelet and wavelet multiple—employed with TVP-VAR are utilised as a robustness check. The macroeconomic variables considered are consumer price index (CPI), real exchange rate (EXR) and nominal effective exchange rate (NEER) for four selected West African economies—Côte d’Ivoire, Gambia, Ghana and Nigeria. The findings of the study reveal that there are significant comovements between the macroeconomic dynamics in a time–frequency domain for the selected economies. From the wavelet multiple technique, the study finds three interesting outcomes. First, there are traces of high comovements between the macroeconomic conditions of some countries in the long term. In addition, NEER has a strong exposure to external shocks due to the presence of periodic swings such as inflation, which makes it largely susceptible to shocks. Second, a high integration of macroeconomic variables, in the long term is found. Third, Global Economic Policy Uncertainty (GEPU) lags in the long term within the interdependencies of CPI as well as NEER but not EXR. This suggests that the presence of inflation most likely exposes these economies to external shocks. However, when this happens, external shocks act as a follower to influence economic activities within this region. The study advocates that governments and policymakers should deploy efficient inflation-targeting monetary policies to enhance price stability and minimise the adverse impact of GEPU for future monetary convergence.