Remittances-exchange rate nexus: A GARCH-MIDAS approach
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This paper investigates the nexus between Remittance growth and Exchange rate volatility in Africa’s ‘Big Four’ economies over the period 1977 to 2022. We employ the Generalised Autoregressive Conditional Heteroscedasticity Mixed Data Sampling (GARCH-MIDAS) modelling framework and find that remittance fluctuations drive higher risk in the exchange rate market for Sub-Saharan African countries- Nigeria and South Africa, while systemic risks drive higher exchange rate market risks for the Middle East and North Africa (MENA) countries in our model- Egypt and Algeria. The study recommends a multi-faceted approach to managing remittance-related risks and enhancing foreign exchange stability by encouraging diversification beyond remittances through promoting non-oil exports, attracting foreign investments, and supporting key sectors.
Abstract
This paper investigates the nexus between Remittance growth and Exchange rate volatility in Africa’s ‘Big Four’ economies over the period 1977 to 2022. We employ the Generalised Autoregressive Conditional Heteroscedasticity Mixed Data Sampling (GARCH-MIDAS) modelling framework and find that remittance fluctuations drive higher risk in the exchange rate market for Sub-Saharan African countries- Nigeria and South Africa, while systemic risks drive higher exchange rate market risks for the Middle East and North Africa (MENA) countries in our model- Egypt and Algeria. The study recommends a multi-faceted approach to managing remittance-related risks and enhancing foreign exchange stability by encouraging diversification beyond remittances through promoting non-oil exports, attracting foreign investments, and supporting key sectors.