Macroeconomic Volatility and Physical Capital Accumulation in Sub-Saharan Africa

The aim of this work is to study the influence of macroeconomic volatility on physical capital accumulation in Sub-Saharan economies. To do this, we relied on a panel of 18 countries in the region, covering the period 1980-2010. In addition, our measures of volatility are obtained after estimating a GARCH (Generalized autoregressive conditional heteroskedasticity) model on four macroeconomics indicators that are the terms of trade, the real effective exchange rate, the GDP’s growth and the inflation rate. After using the LSDV estimator (least square dummy variables), we obtain the following results: (1) a one unit increase in the conditional standard deviation of the real effective exchange rate leads to a decrease of 0.011 percentage point of growth in the stock of physical capital per capita; However, greater trade and financial integration may cancel this effect. (2) With respect to GDP growth, one more unit in his standard deviation raises the growth of physical capital stock per capita of 0.0002 percentage point. And (3), there is no significant effect from the volatility of terms of trade and inflation rate, although with negative signs. Therefore, Governments should implement policies to enhance economic diversification and so, reduce vulnerability and volatility; we also need to promote the establishment of mitigation measures by financial and trade integration.