The moderating effect of interest rate on exchange rate volatility and foreign direct investment: An insight in some sub-Saharan African countries

This study investigated the moderating effect of interest rate on exchange rate volatility’s and foreign direct investment inflows in some Sub-Saharan African countries. The study utilized panel data, spanning the period from 1990 to 2022, using a sample of 38 nations, where the Two Stages Least Square estimator was utilized as the main econometric approach in order to address issues of endogeneity, simultaneity, and reverse causality. The findings of the analysis indicated that, although exchange rate volatility negatively impacts Foreign Direct Investment inflows, its effect was not statistically significant across the models. Meanwhile, interest rates exhibited a positive and significant influence on foreign direct investment inflows. Additionally, the analysis reveals that the interaction between exchange rate volatility and interest rate was positive, but not statistically insignificant, thus suggesting that interest rate did not moderate the effect of exchange rate volatility on foreign direct investment inflows in Sub-Saharan African countries. This study concluded by emphasizing the importance of foreign direct investment inflows, underscoring the need for nuanced and context-specific policies in Sub-Saharan African countries. Further recommendations were made based on the findings of the study. Keywords: Interest Rate, Moderating effect, Two Stage Least Square, Sub-Saharan Africa, Foreign Direct Investment.