Private investment in guinea, does macro-instability matter? A comparative analysis
This paper examines empirically the link between macro-instability and private investment rate in Guinea, in comparison with WAEMU countries . Notwithstanding the caution imposed by data and methodological limitations in interpreting the results, the paper shows that macroeconomic instability is, in general, higher in Guinea than WAEMU countries. Consequently, macroeconomic uncertainties are cause of concern. Using a panel data approach, the findings suggest that the negative effects of relative price volatility (mainly inflation, real effective exchange rates) expected in theory, do not occur when small deviations are combined with competitiveness, resulting from a declining real effective exchange rate. In addition, the positive effect of foreign exchange reserves on the private investment rate supports the view that the availability of foreign exchange reserves is critical in a fixed exchange rate regime as that of WAEMU, as well as in an imperfect floating exchange rate regime as that of Guinea. While the panel data approach shows no evidence of negative impact of macroeconomic uncertainties, it suggests further analysis to explore the robustness of this result. A time series approach is carried out for Guinea, with regard to this purpose. As mentioned above, Guinea registers higher level of macroeconomic instability, compared to WAEMU countries. Using a single error correction model, the counter-intuitive impact of macroeconomic instability variables (measured by the real effective exchange rate, inflation rate and the terms of trade) persists. Given the dominant share of the mining sector in the private investment figures, the findings may be misleading as this sector may be protected from the wrong market signals resulting from the increasing macro-instability. However, capturing such an ‘enclave-effect’ is unfortunately limited by the lack of disaggregated investment data by sector. Finally, the results indicate a negative (indirect) impact of macroeconomic instability (measured by the real lending rate and the flow of credit to the economy) on the private sector investment. They suggest additional efforts to improve the overall macroeconomic context and especially, an in-depth openness of the financial sector, to diversify credit instruments to the private sector in Guinea.
|Date of creation:||04 Feb 2008|
|Publication status:||Published in European Journal of Scientific Research 4.19(2008): pp. 758-783|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Aizenman, Joshua & Marion, Nancy, 1999. "Volatility and Investment: Interpreting Evidence from Developing Countries," Economica, London School of Economics and Political Science, vol. 66(262), pages 157-179, May.
- Dhaneshwar Ghura & Michael T. Hadjimichael, 1995. "Public Policies and Private Savings and Investment in Sub-Saharan Africa; An Empirical Investigation," IMF Working Papers 95/19, International Monetary Fund.
- Buffie, Edward F., 1986. "Devaluation, investment and growth in LDCs," Journal of Development Economics, Elsevier, vol. 20(2), pages 361-379, March.
- L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
- Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
- Pindyck, Robert S, 1988.
"Irreversible Investment, Capacity Choice, and the Value of the Firm,"
American Economic Review,
American Economic Association, vol. 78(5), pages 969-985, December.
- Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
- Peter Montiel & Luis Servén, 2006.
"Macroeconomic Stability in Developing Countries: How Much Is Enough?,"
World Bank Research Observer,
World Bank Group, vol. 21(2), pages 151-178.
- Montiel, Peter & Serven, Luis, 2004. "Macroeconomic stability in developing countries - How much is enough?," Policy Research Working Paper Series 3456, The World Bank.
- Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier.
- Serven, Luis, 2002. "Real exchange rate uncertainty and private investment in developing countries," Policy Research Working Paper Series 2823, The World Bank.
- Oshikoya, Temitope W, 1994. "Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 42(3), pages 573-596, April.
- Rodolphe Blavy, 2004. "Inflation and Monetary Pass-Through in Guinea," IMF Working Papers 04/223, International Monetary Fund.
- Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:11606. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.