Macroeconomic shocks and income growth in Africa: Evidence from a panel structural VAR analysis

African economies are particularly vulnerable to macroeconomic volatility due to structural fragilities, external commodity dependence, and weak policy buffers. This study investigates the pass-through of macroeconomic shocks and their implications for income growth in 15 designated African economies from 2000 to 2024, using a Panel Vector Auto regression (PVAR) and a Panel Structural VAR framework implemented in Python and R Studio; for the PSVAR, we increased the periodicity from 1990 to 2023 using R studio. By integrating time-series dynamics with cross-sectional interdependencies, the PVAR approach provides a robust platform for disentangling the complex interactions among key variables such as GDP growth, inflation, exchange rates, and GDP per capita growth. Using the PSVAR, we estimated two scenarios of an increase and a decrease in growth. We found that a progressive shock to GDP growth brings about a preliminary increase in inflation, and the exchange rate declined from the inflation shock, which leads to depreciation of the currency against the dollar. GDP per capita increased from the shock of the exchange rate. Additionally, a negative shock to GDP growth brings about a decline in GDP; this shock tends to lead to a decline in inflation. The shock from inflation led to an increase in the exchange rate, which can be attributed to the rise in exchange rates resulting from monetary policies. GDP per capita declined from the exchange rate shock. This means an increase in GDP growth leads to a rise in inflation, a reduction in exchange rate, and an upsurge in GDP per capita, while a decline in GDP growth brings about a decrease in inflation, a rise in exchange rate, and a fall in GDP per capita. This paper recommends that policymakers in African economies should strengthen exchange rate management and build policy buffers to alleviate the unfavorable impact of inflation and external shocks on income growth. Secondly, given the dominant influence of exchange rate and inflation on GDP per capita, coordinated monetary and fiscal policies are essential to ensure macroeconomic stability and sustained income growth.

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