EXCHANGE RATE VARIATION, INTEREST RATE DIFFERENTIAL, FINANCIAL DEVELOPMENT AND INVESTMENT

This study examines the threshold effects of exchange rate, interest rate differentials, and financial development on investment growth across seven African countries: Nigeria, Rwanda, Egypt, Ghana, Togo, Gambia, and Kenya, using annual data spanning from 2004 to 2024. This research addresses the limitations of existing literature by moving beyond linear models to capture potential variations in macro-financial relationships that affect investment performance in developing economies. To achieve this, the study employs a multi-method econometric approach. Descriptive statistics and correlation analysis are used to examine data patterns and preliminary relationships among the variables. The core analysis then uses the System GMM method to explore the effects of the independent variables on investment change. The empirical findings reveal significant relationships. Exchange rate volatility negatively affects investment after exceeding specific thresholds, confirming its destabilizing role in uncertain environments. Interest rate differentials have a positive effect within a moderate range but become harmful when excessively large. Similarly, financial development, proxied by domestic credit to the private sector positively influences investment up to a point, after which the benefits begin to diminish, indicating potential financial saturation or inefficiencies. By identifying these tipping points, the study offers valuable insights into how investment responds differently depending on the economic environment. The results suggest that African policymakers need to go beyond standardized solutions. Instead, maintaining stable exchange rates, carefully managing interest rate gaps, and promoting responsible credit growth are key to creating an environment where investment can thrive. Overall, the study contributes to a deeper understanding of the complex and often nonlinear ways in which macroeconomic factors shape investment outcomes across African economies.