Currency fluctuations are a natural outcome of the floating exchange rate system, which is the norm for most major economies. This paper analyzes the role of real exchange rate rer policies in promoting economic development. Exchange rate and economic growth in pakistan 19752011. Effects of exchange rate movements on economic growth in nigeria. Di erent rationales for this association have been o ered, but. The real exchange rate and economic growth dani rodrik john f. It featured not at all in the first generation of neoclassical growth models. The result showed that real exchange rate has a positive effect on the economic growth. The real exchange rate and economic growth inctpped. Economic growth slows when foreign trade credit becomes the predominant means of payment for international transactions.
Impact of exchange rate on the nigeria economic growth project material. Exchange rate regimes and economic performance eduardo levyyeyati and federico sturzenegger this paper studies the impact of exchange rate regimes on inflation, nominal money growth, real interest rates, and gdp growth. The main aim of this thesis is to empirically examine the effect of real exchange rate changes on economic growth. A depreciation of the real exchange rate is associated with an external surplus and a reduced share of imports purchased with credit. This study has been conducted to investigate whether uncertainty or fluctuations in exchange rate affect. Economic growth can be defined as the increase in the inflationadjusted market value of the goods and services produced by an economy over time. The real exchange rate was not at the center of the first generation of neoclassical growth models, nor was it prominent among the policy prescriptions that flowed from those models. An empirical assessment on bangladesh abstract this paper aims to understand the effects of exchange rate changes on economic growth in bangladesh. I show that undervaluation of the currency a high real. The effect of real exchange rate on economic growth in.
The commission on growth and development led by nobel laureate mike spence was established. Atan2 this study investigates the effect of exchange rate movements on real output growth in nigeria. Martin rapetti, peter skott and arslan razmi march 5, 2011 abstract recent research has found a positive relationship between real exchange rate rer undervaluation and economic growth. On exchange rates and economic growth sciencedirect.
Specifically, it examines the extent to which real exchange rate has on the growth rates of the country reflecting real gdp, inflation rate and interest. This paper investigates the effects of real exchange rate on economic growth in ghana over the period 1975 to 2015 using quarterly time series data. Impact of exchange rate regimes on economic growth abstract it has been a challenge to identify a direct correlation between exchange rate regimes and economic growth. The real exchange rate and economic growth english the. Markets provide a suboptimal amount of investment in sectors characterized by learning spillovers. Asher 2012 examined the impact of exchange rate fluctuation on the nigeria economic growth for period of 1980 2010.
The real exchange rate and economic growth european central. Fahrettin 2001 asserted that an exchange rate, as a price of one countrys money. Exchange rate total exports and imports % of gdp chirwa and odhiambo 2016 observed that a decrease in real exchange led to. Kennedy school of government harvard university cambridge, ma 028 revised, september 2008 abstract i provide evidence that undervaluation of the currency a high real exchange rate stimulates economic growth. This paper analyzes the role of the real exchange rate in the growth process, the channels through which the real exchange rate influences other variables, and policies useful and not useful for governing the real rate. Undervaluation and economic growth in selected developing countries. It is conventionally measured as the percent rate of increase in real gross domestic product, or real gdp. One argument in defense of ols regressions of economic growth on the real exchange rate is that the direction of the possible reverse causality, i. Production of goods and services involve exports and imports which in turn involve transactions in foreign exchange, and exchange rate has been characterized by instability which has raised concern about its effect on economic growth. In recent times, the participation of asias emerging markets in global activities has been increasing and this region has attracted the attention of other regions with offshore production and economic growth. The impact of exchange rate regimes on economic growth with.
One of the most important issues left unanswered in international finance is the debates over which type of exchange rate can best stimulate economic growth. Chinas economic growth and its real exchange rate abstract the shocks that underlie chinas comparatively rapid growth include gains in productivity, factor accumulation and policy reforms that increase allocative efficiency. Kennedy school of government harvard university cambridge, ma 028 revised, october 2008 abstract i show that undervaluation of the currency a high real exchange rate stimulates economic growth. Determinants of economic growth panel data approach. The impact of exchange rate fluctuation on the nigerian. The rate of economic growth refers to the geometric annual rate of growth in gdp between the first and the last year over a period of time. Jul 29, 2016 saving and investment are two of the most important tools for economic growth. The interest rate has always been considered an important determinant of saving and investment. Uniprojects aim of providing impact of exchange rate on the nigeria economic growth project research material is to reduce the stress of moving from one school library to another all in the name of searching for. This paper aims to understand the effects of exchange rate changes on economic growth in bangladesh. It can be said that one of the factors determining the way exchange rate fluctuations affect economic growth is the development level of each countrys financial markets. The author confirms the positive effects of real exchange rate on economic growth of china and danson musyoki 2012 finds negative impact of real exchange rate volatility on economic growth. Therefore, increase or decrease of interest rate has no effect on economic growth.
However, according to islamic teachings, riba or earning interest on saving or investment is forbidden, and thus, many muslims try to avoid earning income from the interest rate. Effect of exchange rate fluctuations on the nigeria economy. The effect of exchange rates on economic growth researchgate. The nominal interest rate measures the percentage increase in money loaned over the course of a year.
Real exchange rate policies for economic development. The real exchange rate was not at the center of the first generation of neoclassical growth models, nor was it prominent among the policy prescriptions that. Effects of exchange rate movements on economic growth in. Exchange rate, inflation and macroeconomic performance in the wamz prepared by. The author confirms the positive effects of real exchange rate on economic growth of china and danson musyoki 2012 finds negative impact of. This study has kept its focus on the economic growth of a set of developing countries during the years 19742006. There appears to be no theoretical or empirical consensus on the effect of exchange rate volatility on economic growth. Nonlinear relationship between exchange rate volatility. Please, sit back and study the below research material carefully.
The real exchange rate and economic growth english abstract. We used ols and gmm methods to estimate a growth model with dummy variables that isolate the effect of exchange rate regimes on economic growth. We find that, for nonindustrial economies, long pegs lasting five or more years are associated with lower. Exchange rate regimes and economic growth in central and. By using data collected from 1970 to 2016 applied to a smooth transition regression str model, we are able to prove that the exchange rateeconomic growth correlation is indeed nonlinear within the sampled time period. The results corroborated with the harroddomar model which proved that the growth rate of national income will directly be related to saving ratio andor capital formation i. Exchange rate misalignment and economic growth 123 financial markets as outlined in the above, the economy is often disrupted during a period of sustained misalignment especially overvaluation. First, poverty cannot be reduced in isolation from economic growth an observation that has. The real exchange rate and economic growth1 barry eichengreen university of california, berkeley revised, july 2007 traditionally, the real exchange rate has not been at the center of analyses of economic growth.
The results corroborated with the harroddomar model which proved that the growth rate of national income will directly be related to saving ratio and or capital formation i. Ahortor1 june 2012 abstract the study investigates the effect of changes in the exchange rate on output growth and inflation in the wamz economies. We show that a stable and competitive rer policy may correct for this externality and other related. This working paper should not be reported as representing the views of the european central bank ecb. But the impact on inflation of a change in the exchange rate depends on what else is going on in the economy. Adjustment eventually occurs, often in the context of a currency, balance of payments andor a financial crisis dornbusch 1988, p. It is controversial in the literature whether depreciation of real exchange rate is expansionary or contractionary for the economy. Recent analyses, in contrast, have paid it more attention. Pdf the effect of exchange rates on economic growth. The real exchange rate and economic growth brookings papers on economic activity, 2008, no.
The nexus between exchange rate, exports and economic. This pdf is a selection from an outofprint volume from the national bureau of economic research. Lecture notes economic growth economics mit opencourseware. An economic growth rate is a measure of economic growth from one period to another in percentage terms. In this paper, we challenge the traditional assumption of a linear relationship between exchange rate volatility and economic growth in south africa. It makes use of a keynesian analytical framework to derive an empirical specification, carefully constructs a real exchange rate series, and employs cointegration techniques to determine the output response to taka depreciations. New theories emphasize the high correlation between economic growth and innovation. Freund and pierola find that large sustained depreciations of the real exchange rate typically precede surges of merchandise exports. Abu bakarr tarawalie, momodu sissoho, mohamed conte and christian r. Exchange rate, growth, cointegration, error correction, bangladesh. The real economic growth, or real gdp growth rate, measures economic growth as it relates to the gross domestic product gdp from one period. Therefore, in this case, a depreciation wont cause a fall in economic growth only limit the growth rate. Impact of exchange rate on the nigeria economic growth.
Foreign trade credit is more costly than its domestic analog. Introduction during the twoyear period ending in july 2012, bangladesh experienced an almost 20 per cent fall in the value of its currency with respect to the us dollar. Kogid, asid, lily, mulok, and loganathan 2012 researched the effect of exchange rates on economic growth by using nominal and real exchange rate. Exchange rate economics iii about the series the commission on growth and development led by nobel laureate mike spence was established in april 2006 as a response to two insights. The economic growth rates of nations are commonly compared using the ratio of the gdp to population or percapita income. They are when countries overcome obstacles that previously hindered export growth. The real exchange rate and economic growth dani rodrik. The research has been employed on 16 central and eastern european countries, where the exchange rate arrangement choice is a key point in the years before euro adoption. The effect of exchange rate volatility on economic growth. The impact of exchange rate regimes on economic growth. Ahortor1 june 2012 abstract the study investigates the effect of changes in the exchange rate. According to the fisher effect, increasing the growth rate of the money supply does not affect the real interest rate, but because inflation will eventually occur, people begin to expect inflation, causing the nominal interest rate to rise.
The issue of the possible impact of the real exchange rate on economic growth is an important one at this time a widespread currency war 9 is in prospect cline and williamson, 2010. If the currency appreciates due to speculation, during a period of weak economic growth, then the negative effect on growth may be more pronounced. This is true particularly for developing countries. The real exchange rate and economic growth abstract i show that undervaluation of the currency a high real exchange rate stimulates economic growth. To examine the relationship between exchange rate regimes and economic growth. An exchange rate appreciation causes a slower growth of real gdp because of a fall in net exports reduced injection and a rise in the demand for imports an increased leakage in the circular flow. Is there a positive correlation, as suggested by standard growth. Korkmaz 20 analysed the effect of exchange rate on economic growth gdp for 9 randomly selected european countries france, germany, greece, hungary, italy, spain, turkey, poland and united. Exchange rate intermediate regimes are unable to continue under conditions of capital movement. Real exchange rate, economic growth, instrumental variables, panel data.
Quantitative analysis of the impact of exchange rate. The commission on growth and development led by nobel laureate mike spence was established in april 2006 as a response to two insights. It is a veritable instrument of economic management and therefore an important macroeconomic indicator. The aim of this article is to assess the role of real effective exchange rate volatility on longrun economic growth for a set of 82 advanced and emerging economies using a panel data set ranging. Determinants of economic growth panel data approach edwin dewan shajehan hussein working paper 0104 may 2001 economics department reserve bank of fiji suva fiji the views expressed herein are those of the authors and do not necessarily reflect those of the reserve bank of fiji. The effect of exchange rate fluctuations on economic growth varies in different countries. Firstly, the growth effects of real exchange rate changes are investigated using a wide. Pdf this study attempts to investigate the effects of the exchange rates on economic growth in malaysia using time series data spanning from. The aim of this paper is to analyze this effect for south korea. E conomists have long known that poorly managed exchange rates can be disastrous for economic growth. It is a pleasure to be here in trinidad and tobago and an honor to deliver the w. Some observations on the possible channels 1 martin rapetti2 abstract a recent body of empirical research has documented a strong association between the level and volatility of the rer and economic growth.
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