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

Tipoy Christian K. (), Marthinus Breitenbach () and Mulatu Zerihun ()
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Tipoy Christian K.: School of Accounting, Economics and Finance, University of KwaZulu-Natal, Durban, South Africa

Studies in Nonlinear Dynamics & Econometrics, 2018, vol. 22, issue 2, 16

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.

Keywords: Cross-section dependency; exchange rate misalignment; granger causality; nonlinear panel vector error correction model (search for similar items in EconPapers)
JEL-codes: C23 C24 C26 F43 (search for similar items in EconPapers)
Date: 2018
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