Home Exchange rate misalignment and economic growth: evidence from nonlinear panel cointegration and granger causality tests
Article
Licensed
Unlicensed Requires Authentication

Exchange rate misalignment and economic growth: evidence from nonlinear panel cointegration and granger causality tests

  • Christian K. Tipoy , Marthinus C. Breitenbach ORCID logo and Mulatu F. Zerihun ORCID logo EMAIL logo
Published/Copyright: November 8, 2017

Abstract

We analyse the impact of exchange rate misalignment on economic growth for a sample of emerging economies from 1970 to 2014 using a panel smooth transition regression vector error correction model. Besides, we provide a granger causality test conducted in a non-linear framework. We find that a rise in misalignment increases significantly the output in the short-run when currencies are close to equilibrium. When they are highly misaligned, the impact on growth is reduced. However, no significant impact of output on misalignment was found in the short-run. We provide evidence that misalignment granger causes the output at any given level of misalignment both in the short and long-run. Weaker granger causality was found between output and misalignment. This raises some important policy implications. Although emerging economies can use undervaluation as a growth strategy, the benefits are smaller when currencies are highly undervalued. There is, therefore, an incentive to keep exchange rates closer to their equilibrium.

JEL Classification: C23; C24; C26; F43

References

Aguirre, A., and C. Calderón. 2005. “Real Exchange Rate Misalignments and Economic Performance.” Documentos de Trabajo (Banco Central de Chile), 1–49.Search in Google Scholar

Aizenman, J., and J. Lee. 2007. “International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence.” Open Economies Review 18: 191–214.10.3386/w11366Search in Google Scholar

Alberola, E. 2003. “Misalignment, Liabilities Dollarization and Exchange Rate Adjustment in Latin America.” Banco de España Research Paper No. WP-0309.10.2139/ssrn.981338Search in Google Scholar

Alberola, E., H. Lopez, A. J. Ubide, and S. G. Cervero. 1999. “Global Equilibrium Exchange Rates: Euro, Dollar,’Ins’, ’Outs’, and Other Major Currencies in a Panel Cointegration Framework.” IMF Working Paper.10.2139/ssrn.880830Search in Google Scholar

Bai, J., and S. Ng. 2004. “A Panic Attack on Unit Roots and Cointegration.” Econometrica 72 (4): 1127–1177.10.1111/j.1468-0262.2004.00528.xSearch in Google Scholar

Bai, J., C. Kao, and S. Ng (2009): “Panel Cointegration with Global Stochastic Trends.” Journal of Econometrics 149: 82–99.10.1016/j.jeconom.2008.10.012Search in Google Scholar

Banerjee, A., M. Marcellino, and C. Osbat. 2004. “Some Cautions on the use of Panel Methods for Integrated Series of Macroeconomic Data.” The Econometrics Journal 7: 322–340.10.1111/j.1368-423X.2004.00133.xSearch in Google Scholar

Bénassy-Quéré, A., S. Béreau, and V. Mignon. 2009. “Robust Estimations of Equilibrium Exchange Rates within the g 20: A Panel BEER Approach.” Scottish Journal of Political Economy 56: 608–633.10.1111/j.1467-9485.2009.00500.xSearch in Google Scholar

Béreau, S., A. L. Villavicencio, and V. Mignon. 2012. “Currency Misalignments and Growth: A New Look using Nonlinear Panel Data Methods.” Applied Economics 44: 3503–3511.10.1080/00036846.2011.577022Search in Google Scholar

Berg, A. and Y. Miao. 2010. “The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back?” IMF Working Papers, 1–24.Search in Google Scholar

Chang, Y. 2004. “Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency.” Journal of Econometrics 120: 263–293.10.1016/S0304-4076(03)00214-8Search in Google Scholar

Clark, P. and R. MacDonald. 1998. “Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEERs.” IMF Working Paper.10.2139/ssrn.882342Search in Google Scholar

Colletaz, G., and C. Hurlin. 2006. “Threshold Effects of the Public Capital Productivity: An International Panel Smooth Transition Approach.” Document de Recherche du Laboratoire d’ Economie d’ Orléans, 1.Search in Google Scholar

Couharde, C., and A. Sallenave. 2013. “How do Currency Misalignments’ Threshold Affect Economic Growth?” Journal of Macroeconomics 36: 106–120.10.1016/j.jmacro.2012.11.002Search in Google Scholar

Dooley, M. P., D. Folkerts-Landau, and P. Garber. 2003. “An Essay on the Revived Bretton Woods System.” Technical report, National Bureau of Economic Research.10.3386/w9971Search in Google Scholar

Driver, R. L., and P. F. Westaway. 2005. “Concepts of Equilibrium Exchange Rates.” Bank of England Publications Working Paper.10.2139/ssrn.723981Search in Google Scholar

Elbadawi, I., L. Kaltani, and R. Soto. 2009. “Aid, Real Exchange Rate Misalignment and Economic Performance in Sub-Saharan Africa.” Available at SSRN 1526569.10.2139/ssrn.1526569Search in Google Scholar

Engle, R. F., and C. W. Granger. 1987. “Co-Integration and Error Correction: Representation, Estimation, and Testing.” Econometrica: Journal of the Econometric Society 251–276.10.2307/1913236Search in Google Scholar

González, A., T. Teräsvirta, and D. v. Dijk. 2005. “Panel Smooth Transition Regression Models.” Technical report, SSE/EFI Working Paper Series in Economics and Finance.10.1017/CBO9780511606885.007Search in Google Scholar

Hansen, B. 1999a. “Testing for Linearity.” Journal of Economic Surveys 13: 551–576.10.1111/1467-6419.00098Search in Google Scholar

Hansen, B. E. 1999b. “Threshold Effects in Non-Dynamic Panels: Estimation, Testing, and Inference.” Journal of Econometrics 93: 345–368.10.1016/S0304-4076(99)00025-1Search in Google Scholar

Im, K. S., M. H. Pesaran, and Y. Shin. 2003. “Testing for Unit Roots in Heterogeneous Panels.” Journal of Econometrics 115: 53–74.10.1016/S0304-4076(03)00092-7Search in Google Scholar

Jochmann, M., and G. Koop. 2015. “Regime-Switching Cointegration.” Studies in Nonlinear Dynamics & Econometrics 19: 35–48.10.1515/snde-2012-0064Search in Google Scholar

Kamar, B., and S. Ben Naceur. 2007. “Gcc Monetary Union and the Degree of Macroeconomic Policy Coordination.” IMF Working Paper, 1–33.10.5089/9781451868128.001Search in Google Scholar

Kapetanios, G., Y. Shin, and A. Snell. 2003. “Testing for a Unit Root in the Nonlinear Star Framework.” Journal of Econometrics 112: 359–379.10.1016/S0304-4076(02)00202-6Search in Google Scholar

Kapetanios, G., Y. Shin, and A. Snell. 2006. “Testing for Cointegration in Nonlinear Smooth Transition Error Correction Models.” Econometric Theory 22: 279–303.10.1017/S0266466606060129Search in Google Scholar

Li, J. 2006. “Testing Granger Causality in the Presence of Threshold Effects.” International Journal of Forecasting 22: 771–780.10.1016/j.ijforecast.2006.01.003Search in Google Scholar

Luukkonen, R., P. Saikkonen, and T. Teräsvirta. 1988. “Testing Linearity Against Smooth Transition Autoregressive Models.” Biometrika 75: 491–499.10.1093/biomet/75.3.491Search in Google Scholar

MacDonald, R. 1997. “What Determine Real Exchange Rate? The Long and Short of it.” Journal of International Financial Markets, Institutions and Money 8, 117–153.10.1007/978-94-011-4411-7_9Search in Google Scholar

Maddala, G. S. and S. Wu. 1999. “A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test.” Oxford Bulletin of Economics and Statistics 61: 631–652.10.1111/1468-0084.0610s1631Search in Google Scholar

Maki, D. 2010. “An Alternative Procedure to Test for Cointegration in Star Models.” Mathematics and Computers in Simulation 80: 999–1006.10.1016/j.matcom.2009.12.003Search in Google Scholar

Moon, H. R. and B. Perron. 2004. “Testing for a Unit Root in Panels with Dynamic Factors.” Journal of Econometrics 122: 81–126.10.1016/j.jeconom.2003.10.020Search in Google Scholar

Omay, T. and E. Ö. Kan. 2010. “Re-examining the Threshold Effects in the Inflation–Growth Nexus: Oecd Evidence.” Economic Modelling 27: 996–1005.10.1016/j.econmod.2010.04.011Search in Google Scholar

Omay, T., M. Hasanov, and N. Ucar. 2012. “Energy Consumption and Economic Growth: Evidence from Nonlinear Panel Cointegration and Causality Tests.” Applied Econometrics 34: (2): 36–55.Search in Google Scholar

Pesaran, M.H. 2004. General Diagnostic Tests for Cross Section Dependence in Panels. CESifo Working Paper Series No. 1229; IZA Discussion Paper No. 1240. DOI: .10.2139/ssrn.572504Search in Google Scholar

Pesaran, M. H.. 2007. “A Simple Panel Unit Root Test in the Presence of Cross-Section Dependence.” Journal of Applied Econometrics 22: 265–312.10.1002/jae.951Search in Google Scholar

Pesaran, M. H. and R. Smith. 1995. “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels.” Journal of Econometrics 68: 79–113.10.1016/0304-4076(94)01644-FSearch in Google Scholar

Rapetti, M. 2013. “The Real Exchange Rate and Economic Growth: Some Observations on the Possible Channels.” Technical report, Working Paper, University of Massachusetts, Department of Economics.Search in Google Scholar

Rapetti, M., P. Skott, and A. Razmi. 2012. “The Real Exchange Rate and Economic Growth: Are Developing Countries Different?” International Review of Applied Economics 26: 735–753.10.1080/02692171.2012.686483Search in Google Scholar

Rodrik, D. 2008. “The Real Exchange Rate and Economic Growth.” Brookings Papers on Economic Activity 2008: 365–412.10.1353/eca.0.0020Search in Google Scholar

Rogoff, K. 1996. “The Purchasing Power Parity Puzzle.” Journal of Economic Literature 34: 647–668.Search in Google Scholar

Schnatz, B., F. Vijselaar, and C. Osbat. 2003. Productivity and the (‘Synthetic’) Euro-Dollar Exchange Rate Frankfurt, Germany: European Cental Bank. 1725-2806(online).10.2139/ssrn.411588Search in Google Scholar

Siregar, R. 2011. The Concepts of Equilibrium Exchange Rate: A Survey of Literature. Munich Personal RePEc Archive. Paper No. 28987. pp. 21–37.Search in Google Scholar

Taylor, M. P., and L. Sarno. 2001. “Real Exchange Rate Dynamics in Transition Economies: A Nonlinear Analysis.” Studies in Nonlinear Dynamics & Econometrics 5: 153–177.10.1162/10811820160080077Search in Google Scholar

Teräsvirta, T. 1994. “Specification, Estimation, and Evaluation of Smooth Transition Autoregressive Models.” Journal of the American Statistical Association 89: 208–218.Search in Google Scholar

Ucar, N. and T. Omay. 2009. “Testing for Unit Root in Nonlinear Heterogeneous Panels.” Economic Letters 104: 5–8.10.1016/j.econlet.2009.03.018Search in Google Scholar

Williamson, J. 1994. “Estimating Equilibrium Exchange Rates.”Search in Google Scholar

Williamson, J. 2004. “The Washington Consensus as Policy Prescription for Development.” Development Challenges in the 1990s: Leading Policymakers Speak from Experience 31–33.Search in Google Scholar


Supplemental Material

The online version of this article offers supplementary material (DOI: https://doi.org/10.1515/snde-2016-0117).


Published Online: 2017-11-8

©2018 Walter de Gruyter GmbH, Berlin/Boston

Downloaded on 7.11.2025 from https://www.degruyterbrill.com/document/doi/10.1515/snde-2016-0117/html
Scroll to top button