Rethinking the Exchange Rate Volatility-Economic Growth Relationship: A Panel Data Approach

Year 2021, Volume: 23 Issue: 3, 1001 - 1016, 31.12.2021

Erkan Ağaslan , Buket Alkan

https://doi.org/10.26745/ahbvuibfd.1001886

Abstract

In this study we wanted to find out the effect of volatility, which is accepted as a measure of exchange rate uncertainty in the literature, on economic growth. Data for the period between 2002 and 2019 for 28 countries, with the distinction of developed and developing countries, were included in the study. The GARCH modeling was used for the volatility series of the countries and the analysis was carried out with the panel corrected standard errors (PCSE) estimator, which takes into account the cross-sectional dependence problem that frequently occurs in panel data analysis studies. The findings of the study showed that the negative effect of exchange rate volatility on economic growth in developing countries is very high compared to developed countries. In addition, it has been determined that while the contribution of human capital to economic growth is negative in developing countries, this effect is positive in developed countries. Another point supported by the findings in the study is that the volatility of the exchange rate more than the level of the exchange rate has a negative effect on economic growth. Considering the production structures of developing countries, it is suggested that production strategies based on intense energy and raw material imports should be in line with the findings, and attention should be paid to this issue with the help of policies aimed at reducing foreign dependency.

Keywords

Exchange Rate Volatility, Uncertainty, Economic Growth, PCSE Method

Döviz Kuru Oynaklığı ve Ekonomik Büyüme İlişkisine Yeniden Bakış

Abstract

Bu çalışmada literatürde döviz kurundaki belirsizliğin ölçüsü olarak kabul edilen oynaklığın ekonomik büyüme üzerindeki etkisi araştırılmıştır. Gelişmiş ve gelişmekte olan ülkeler ayrımıyla 28 ülke için 2002 – 2019 dönemi verileri araştırmaya dahil edilmiştir. Ülkelerin oynaklık serileri için GARCH modellemesinden faydalanılmış ve panel veri analizi çalışmalarında sıklıkla ortaya çıkan yatay kesit bağlanım sorununu dikkate alan panel düzeltilmiş standart hatalar (PCSE) tahmincisi ile analiz gerçekleştirilmiştir. Çalışmadan elde edilen bulgular gelişmekte olan ülkelerde döviz kuru oynaklığının ekonomik büyüme üzerindeki negatif etkisinin gelişmiş ülkelere kıyasla çok yüksek olduğunu göstermiştir. Ayrıca gelişmekte olan ülkelerde beşerî sermayenin ekonomik büyüme katkısı negatif iken gelişmiş ülkelerde bu etkinin pozitif olduğu tespit edilmiştir. Çalışmada bulgularla desteklenen bir diğer husus döviz kurunun seviyesinden daha fazla kurun volatilitesinin ekonomik büyüme üzerinde negatif etki yaptığıdır. Gelişmekte olan ülkelerin üretim yapıları dikkate alındığında yoğun enerji ve hammadde ithalatına bağlı üretim stratejilerinin bulgulara paralel olması, dışa bağımlılığın azaltılmasına yönelik politikalara yardımıyla bu hususa dikkatin verilmesi gerektirebileceği önerilmektedir.

Keywords

Döviz Kuru Volatilitesi, Belirsizlik, Ekonomik Büyüme, PCSE Yöntemi

References

• KAYNAKÇA Aghion, P., Bachetta, P., Ranciere, R., & Rogoff , K. (2009). Exchange rate volatility and productivity growth: The role of financial development. Journal of Monetary Economics, vol. 56, issue 4, 494-513.
• Agiomirgianakis, G., Serenis, D., & Tsounis, N. (2014). Exchange Rate Volatility and Tourist Flows into Turkey. Journal of Economic Integration, 700 - 725.
• Andersen, T. G., Bollersev, T., Diebold, F. X., & Labys, P. (2011). The Distribution of Realized Exchange Rate Volatility. Journal of the American Statistical Association, 42-55.
• Barguellil, A., Ben Salha, O., & Zmami , M. (2018). Exchange Rate Volatility and Economic Growth. Journal of Economic Integration 33(2), 1302-1336.
• Bleaney , M., & Greenaway, S. (2001). The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa. Journal of Development Economics, vol. 65, issue 2, 491-500.
• Bollersev, T., Engel, R. F., & Nelson, D. B. (1994). ARCH Models. Chicago: University of Chicago and N.B.E.R.
• Caballero, R., & Krishnamurthy, A. (2004). Exchange Rate Volatility And The Credit Channel in Emerging Markets: A Vertical Perspective . NBER Working Paper Series, 1-32.
• Chen, J. (2012). Real exchange rate and economic growth: evidence from Chinese provincial data (1992 - 2008). Paris School of Economics Working paper, 1 - 27.
• Danmola, R. A. (2013). The Impact Of Exchange Rate Volatility On The Macro Economic Variables In Nigeria . European Scientific Journal, 152 - 162.
• Edwards, S. (2005). Flexible Exchange Rates As Shock Absorbers. European Economic Review, v49(8,Nov), 2079-2105.
• Ehikioya , B. (2019). The impact of exchange rate volatility on the Nigerian economic growth: An empirical investigation. Journal of Economics and Management 37(3), 45-68.
• Eichengreen , B., & Leblang , D. (2003). Exchange Rates and Cohesion: Historical Perspectives and Political-Economy Considerations. Journal of Common Market Studies, 41, 797-822.
• Engle, R. F. (1982). Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of U.K. Inflation. Econometrica, 987 - 1008.
• Gala, P. (2008). Real Exchange Rate Levels and Economic Development: Theoretical Analysis and Econometric Evidence . Cambridge Journal of Economics, Vol. 32, No. 2, 273-288.
• Gayaker, S., Erkan , A., Alkan, B., & Çiçek, S. (2021). The deterioration in credibility, destabilization of exchange rate and the rise in exchange rate pass-through in Turkey. International Review of Economics & Finance, Vol.76, , 571-587.
• Ghosh , A., Gulde , A.-M., Ostry H, J., & Wolf, H. (1997). Does the Exchange Rate Regime Matter for Inflation and Growth? WASHINGTON, D.C.: INTERNATIONAL MONETARY FUND.
• Habib, M., Mileva, E., & Stracca, L. (2016). The real exchange rate and economic growth: revisiting the case using external instruments. Frankfurt: ECB Working Paper, No. 1921, ISBN 978-92-899-2169-5, European Central Bank (ECB).
• Hansen, E. B. (1995). Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power. Econometric Theory, 1148 - 1171.
• Hoyos, R., & Sarafidis, V. (2006). Testing for Cross-Sectional Dependence in Panel-Data Models. The Stata Journal, 482–496.
• Janus , T., & Riera-Crichton , D. (2015). Real Exchange Rate Volatility, Economic Growth and the Euro. Journal of Economic Integration 30(1), 148-171.
• Kılıç, C. (2015). Effects of Globalization on Economic Growth: Panel Data Analysis for Developing Countries. Economic Insights – Trends and Challenges, 1 - 11.
• Lensink, R., & Morrissey, O. (2006). [31] Lensink, R. and O. Morrissey. 2006. “Foreign Direct Investment: Flows, Volatility, and the Impact on Growth. Review of International Economics, 478 - 493.
• Miyajima, K. (2020). Exchange Rate Volatility and Pass‐Through to Inflation in South Africa. African Development Review, 1 - 15.
• Nuroğlu, E., & Kunst, R. (2012). The effects of exchange rate volatility on international trade flows: evidence from panel data analysis and fuzzy approach. Munich Personal RePEc Archive Paper No. 49952.
• Osabuohien, E., Obiekwe, E., Urhie, E., & Osabohien, R. (2016). Inflation Rate, Exchange Rate Volatility and Exchange Rate Pass-Through Nexus: The Nigerian Experience. Journal of Applied Economic Sciences, 574 - 585.
• Özata, E. (2020). The effect of exchange rate volatility on economic growth in Turkey. . Journal of Business, Economics and Finance (JBEF), V.9(1), 42-51.
• Pesaran, H. M. (2004). General Diagnostic Test for Cross Section Dependence in Panels. Working Paper, University of Cambridge & USC.
• Pesaran, H. M. (2006). Estimation and Inference in Large Heterogeneous Panels With A Multifactor Error structure. Econometrica, 967 - 1012.
• Rapetti, M. (2011). For Economic Development Does the Real Exchange Rate Matter? New York: Friedrich-Ebert-Stiftung.
• Reed, R., & Webb, R. (2010). The PCSE Estimator is Good, Just not as Good as You Think . Journal of Time Series Econometrics, 1-29.
• Rodrik, D. (2008). The Real Exchange Rate and Economic Growth. 366 Brookings Papers on Economic Activity, 365-412.
• Schnabl , G. (2007). Exchange Rate Volatility and Growth in Emerging Europe and East Asia. Open Economies Review 20(4), 565-587.
• Selimi, N., & Selimi, V. (2017). The effects of exchange rate on economic growth in the republic of Macedonia. Ecoforum Journal, 6(3), 50-55.
• Tarawalie, A., Sissoho, M., Conte, M., & Ahortor, C. (2012). Exchange rate, inflation and macroeconomic performance in West African Monetary Zone. WAMI Occasional Paper Series No.2.
• Tule , K., Victor, O., Uwawunkonye, E., Fumilad, O., & Nathaniel, G. (2020). Does Exchange Rate Volatility Affect Economic Growth in Nigeria? International Journal of Economics and Finance; Vol. 12, No. 7, 54-71.
• Umaru, H., Aguda , N., & Nordiana, O. (2018). The Effects of Exchange Rate Volatility on Economic Growth of West African English-Speaking Countries. International Journal of Academic Research in Accounting Finance and Management Sciences 8(4), 131-143.
• Vieira , F., Holland, M., Gomes da Silva, C., & Bottecchia, L. (2013). Growth and exchange rate volatility: a panel data analysis. Applied Economics, 3733–3741.