The real exchange rate and economic growth abstract i show that undervaluation of the currency a high real exchange rate stimulates economic growth. Exchange rates and the choice of the exchange rate regime retain a centre stage in the postcrisis environment especially for emerging economies klein and shambaugh, 2010, rose, 2011, ghosh et al. As a nominal variable, the exchange rate regime might not affect the longrun economic growth. Effects of exchange rate movements on economic growth in nigeria eme o. Exchange rate volatility and economic growth article pdf available in journal of economic integration 332. There were several reasons underlying the change that is reflected in the decision of the growth commission to seek a paper on exchangerate analysis. Beside the exchange rate i use variables such as education, private. Data was collected from the cbnstatistical bulletin in nigeria from 2003 20and the. First, poverty cannot be reduced in isolation from economic growthan observation that has. While overvaluation hampers gdp growth, as well as growth and employment in export sectors, we have. Di erent rationales for this association have been o ered, but. There were several reasons underlying the change that is reflected in the decision of the growth commission to seek a paper on exchange rate analysis.
Jan 20, 2020 economic growth means an increase in real gdp which means an increase in the value of national outputnational expenditure. 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. Hopper r eaders of the financial press are familiar with the gyrations of the currency market. 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.
Chinas real exchange rate to alternative growth shocks. The real exchange rate and economic growth, brookings papers on economic activity, economic studies program, the brookings institution, vol. 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. The impact of exchange rate regimes on economic growth with. The exchange rate and economic growth semantic scholar. Exchange rate policy and export performance in efficiency.
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. The exchange rate is the rate at which one currency trades against another on the foreign exchange market. Devaluation of currency has an ambiguous effect on economic growth of a country. Atan2 this study investigates the effect of exchange rate movements on real output growth in nigeria. No matter which way currencies zig or zag, it seems there is always an analyst with a quotable, ready explanation. The real exchange rate and economic growth brookings papers on economic activity, 2008, no.
First, an improved understanding of this relationship may provide policymakers and economic advisors with a greater depth of knowledge upon which to make decisions to restore economic equilibrium to a. There is no relationships that exist between the nigerian exchange rate policies on her level of economic growth since 19902008. There is a relationship that exists between the nigerias exchange rate policies on her level of economic growth since 19902008. For example, an appreciation of the exchange rate usually reduces the price of imported consumer goods and durables, raw materials and capital goods. Bangladesh to achieve a set of diverse objectives of economic growth. However, when the tradable sector is capital intensive, the increase may enhance investment and economic growth. The real exchange rate and economic growth dani rodrik.
Kogid, asid, lily, mulok, and loganathan 2012 researched the effect of exchange rates on economic growth by using nominal and real exchange rate. Recent researches have been done on the testing of international fisher effect, interest rate, gdp growth rate and purchasing power parity, but few researches based on regression. Based on quarterly series for the period 1986 to 2010, the paper examines the possible direct and indirect. Wolf 1997 international monetary fund september 1996. The real exchange rate and economic growth1 barry eichengreen. Ethiopias growth miracle 3 political stability 4 currency stability and exchange rate policy 5 inflation management 6 changing structure of gdp 7 investment in infrastructure 9 policy. 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. Impact of per capita income on exchange rate with regression tool. 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.
Nov 01, 2010 in this article we test the relationship between per capita income differential and exchange rate differential between two different economic background countries. This article aims to understand the effects of exchange rate movements on eco. 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. Economic growth in the middle east and north africa region. That said, the idea that minimizing exchange rate volatility is an essential part of the growth recipe is disputed. This pdf is a selection from an outofprint volume from the national bureau of economic research. Exchange rate and economic growth in pakistan 19752011. Changes in the prices of imported goods and services this has a direct effect on the consumer price index. The exchange rate affects the rate of inflation in a number of direct and indirect ways. 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. The effect of real exchange rate on economic growth in. The main aim of this thesis is to empirically examine the effect of real exchange rate changes on economic growth.
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. Effects of exchange rate movements on economic growth in nigeria. Does the exchange rate regime matter for inflation and growth. Foreign capital and economic growth, nber working papers 619, national bureau of economic research, inc.
As a result the stock exchange market is able to influence investment and economic growth. Although the theoretical relationships are ambiguous, evidence suggests a strong link between the choice of the exchange rate regime and economic performance. 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. The real exchange rate and economic growth yolcu karadam, duygu ph. The real exchange rate and economic growth brookings institution. This is true particularly for developing countries.
It is controversial in the literature whether depreciation of real exchange rate is expansionary or contractionary for the economy. The impact of exchange rate regime s on economic growth. The evidence linking exchange rate volatility to exports and investment is less than definitive. Recent analyses, in contrast, have paid it more attention. The real exchange rate and economic growth inctpped. Real exchange rate policies for economic development. The real exchange rate and economic growth a thesis submitted. In this article we test the relationship between per capita income differential and exchange rate differential between two different economic background countries. This paper analyzes the role of real exchange rate rer policies in promoting economic development. 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. Currency devaluation and economic growth the case of. In particular, there is a significant divide between policymakers and economists regarding the impact of foreign exchange policies on growth. The commission on growth and development led by nobel laureate mike spence was established in april 2006 as a response to two insights.
Undervaluation and economic growth in selected developing countries, 19502004 china 0 4 2 6 8 0. The author confirms the positive effects of real exchange rate on economic growth of china and danson musyoki 2012 finds negative impact of. Use the free adobe acrobat reader to view pdf files. Exchange rates and the choice of the exchange rate regime retain a centre stage in the post crisis environment especially for emerging economies klein and. Firstly, the growth effects of real exchange rate changes are investigated using a wide. To the extent that interest rates of foreign exchange reserves are low, an increase in foreign reserves also leads to a permanent decline in consumption. The effect of real exchange rate on economic growth in ghana. Foreign capital and economic growth, iza discussion papers 3186, institute of labor economics iza. The effect of exchange rate fluctuations on economic growth varies in different countries.
Empirical investigation in a developing countryas setup, international journal of world policy and development studies, academic research publishing group, vol. In the developingcountry context, the real exchange rate is likely to matter less, while political risk is more important for competitiveness in key service sectors like tourism. How can economic growth in the middle east and north africa region be accelerated. Pdf the effect of exchange rates on economic growth.
Economic growth means an increase in real gdp which means an increase in the value of national outputnational expenditure. The real exchange rate and economic growth dani rodrik john f. The large stock exchange market lower the cost of mobilizing savings, facilitating investment. Economic growth is an important macroeconomic objective because it enables increased living standards, improved tax revenues and helps to create new jobs. Development economics this paper analyzes the role of real exchange rate. How concerned should developing countries be about g3 exchange rate volatility. As a result of the study, it has been found that there is causality from exchange rate towards economic growth for the nine european countries. Currency devaluation and economic growth the case of ethiopia. The aim of this study is to investigate the impact of exchange rate fluctuation on economic growthin nigeria within the context of four profound theories. The stock exchange market mainly provides liquidity by enabling firm to raise funds through the sell of securities with relative ease and speed. The real exchange rate and economic growth european central. Thus, the monetary policy needed in developing countries is also different than developed countries. Growth over the last nine years was far beyond the growth rates recorded in aggregate terms for subsaharan africa ssa, which on average only reached 5.
Developing economies are different than developed economies in many aspects, i. In this paper i analyze the effects of devaluation on gdp per capita growth in ethiopia using time series data from 1980 to 2010. Economic issues 2does the exchange rate regime matter for. The paper argues that adopting a pegged exchange rate can lead to lower inflation, but also to slower growth in productivity. Economic issues 2does the exchange rate regime matter. The relative price of tradable goods to nontradable goods that is, the real exchange rate. Dec 24, 2017 the exchange rate is the rate at which one currency trades against another on the foreign exchange market. This paper aims to understand the effects of exchange rate changes on economic growth in bangladesh. 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. It finds that on average per capita gdp growth was slightly faster under floating regimes than under pegged. A number of economists have discussed how many countries with alleged float regimes do in fact intervene their exchange rates heavily.