Impact of Exchange Rate Volatility on Macroeconomic Performance in Sudan

This paper investigates the impact of exchange rate volatility on macroeconomic performance in Sudan, focusing on three key indicators namely, economic growth, foreign direct investment and trade balance, during the period (1979-2009). The study measures the volatility of real effective exchange rate (REER) using the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model. The results of the 2SLS method reveal that REER volatility has a detrimental impact on economic growth and flow of foreign direct investment into Sudan. This finding implies that volatility of REER has played important role in the fluctuations of economic growth and FDI inflows during the last decades. The results also point out that volatility of the exchange rate has a positive impact on current account balance, indicating that exchange rate flexibility enhances the balance of payment adjustment in response to the international shocks. Moreover, the results of the robustness checks of variance decomposition and impulse response function analysis confirm the findings of 2SLS estimators.  

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