Heterogeneous relationship between growth and exchange rate misalignment: Evidence for African Countries?
Keywords:
Real equilibrium exchange rate, Misalignments, Economic growth, Grouped fixed effect estimator, AfricaAbstract
The aim of this study is to analyze the heterogeneous relationship between economic growth and exchange rate misalignment in Africa. We employ the Grouped Fixed Effect (GFE) estimator. The study is based on annual data covering 38 African countries over the period 1996-2019. Three groups of countries were endogenously identified, revealing a differential impact ranging from -0.038796 to -0.001293. Our results primarily indicate that exchange rate misalignments reduce the pace of real economic growth, regardless of the income level. Moreover, these effects are more pronounced for low-income countries. Finally, fixed exchange rate regimes, followed by intermediate regimes, slow down economic growth more than flexible regimes. The major innovation of this study lies in the use of the Grouped Fixed Effect (GFE) estimator. It has allowed for the extension of the study to cover the entire African continent, in contrast to previous studies.
References
Aghion, P., Bacchetta, P., Ranciere, R., Rogoff, K. (2009). Exchange rate volatility and productivity growth: The role of financial development. Journal of Monetary Economics, 56 (4), 494–513. https://doi.org/10.1016/j.jmoneco.2009.03.015
Aguirre, A., Calderon, C. (2005). Real exchange rate misalignments and economic performance. Santiago: Central Bank of Chile", Working Paper, 315, 1-49. https://ideas.repec.org/p/chb/bcchwp/316.html
Akram, V., Rath, B. N. (2018). Exchange rate misalignment and total factor productivity growth in case of emerging market economies. International Economics and Economic Policy, 15, 547–564. https://doi.org/10.1007/s10368-017-0374-6
Amor, T. H., Nouira, R., Rault, C., Sova, A. D. (2023). Real exchange rate misalignments and economic growth in Tunisia: New evidence from a threshold analysis of asymmetric adjustments. The Quarterly Review of Economics and Finance, 88, 215-227. https://doi.org/10.1016/j.qref.2023.01.007
Ayele, G. M. (2022). Real exchange rate misalignment and economic growth in East African least developed countries. Heliyon, 8 (11). https://doi.org/10.1016/j.heliyon.2022.e11840
Balassa, B. (1964). The purchasing power parity doctrine: A reappraisal. Journal of Political Economy, 72(6), 584-596. Balassa, B. (1964). The purchasing power parity doctrine: A reappraisal. Journal of Political Economy, 72(6), 584-596. https://www.jstor.org/stable/1829464
Bonhomme, S., Manresa, E. (2015). Grouped patterns of heterogeneity in panel data. Econometrica, Vol. 83, No 3, pp. 1147-1184. https://www.jstor.org/stable/43616962
Cavallo, D., Cottani, J., Khan, M. S. (1990). Real exchange rate behavior and economic performance in LDCs. Economic Development and Cultural Change, 39(1), 61-76. https://www.jstor.org/stable/1154104
Clark, P., MacDonald, R. (1999). Exchange rates and economic fundamentals: A methodological comparison of BEERs and FEERs. In R. MacDonald, & J. L. Stein (Eds.). Recent economic thought series: 69. Equilibrium exchange rates, Dordrecht: Springer, 285-322. ISBN978-94-010-5896-4
Dollar, D. (1992). Outward-oriented developing economies really do grow more rapidly: Evidence from 95 LDCs, 1976-1985. Economic Development and Cultural Change, 40, 523–544. https://doi.org/10.1086/451959
Edwards, S. (1988). Real and monetary determinants of real exchange rate behavior: Theory and evidence from developing countries. Journal of Development Economics, 29(3), 311-341. https://doi.org/10.1016/0304-3878(88)90048-X
Elbadawi, I., Kaltani, L., Soto, R. (2012). Aid, real exchange rate misalignment and economic performance in sub-Saharan Africa. Estimating equilibrium exchange rates. World Development, 40(4), 681-700. https://doi.org/10.1016/j.worlddev.2011.09.012
Fidora, M., Giordano, C., Schmitz, M. (2021). Real exchange rate misalignments in the euro area. Open Economies Review, 32, 71-107. https://doi.org/10.1007/s11079-020-09596-1
Gala, P., Lucinda, C. R. (2006). Exchange rate misalignment and growth: Old and new econometric evidence. Revista Economia, 7(4), 165-187. https://www.anpec.org.br/revista/vol7/vol7n4p165_187.pdf
Guzman, M., Ocampo, J. A., Stiglitz, J. (2018). Real exchange rate policies for economic development. World Development, 110, 51-62. https://doi.org/10.1016/j.worlddev.2018.05.017
Husain, A. M., Mody, A., Rogoff, K. S. (2005). Exchange rate regime durability and performance in developing versus advanced economies. Journal of Monetary Economics, 52(1), 35-64. https://doi.org/10.1016/j.jmoneco.2004.07.001
Ilzetzki, E. O., Reinhart, C. M., Rogoff, K. S. (2019). Exchange rate arrangements entering the 21st century: Which anchor will hold? Quarterly Journal of Economics, 134(2), 599-646. https://doi.org/10.1093/qje/qjy033
Imbs, J., Wacziarg, R. (2003). Stages of diversification. The American Economic Review, 93(1), 63-86. https://www.jstor.org/stable/3132162
Jones, C., Kiguel, A. A. (1994). Africa’s quest for prosperity: Has adjustment helped? Finance & Development, 31, 2-5. DOI: https://doi.org/10.5089/9781451952599.022
Khalid, W., Civcir, I., Özdeşer, H., Iqbal, J. (2023). The asymmetric impact of real exchange rate misalignment on growth dynamics in Turkey. Journal of Policy Modeling, 45(6), 1184-1203. DOI: 10.1016/j.jpolmod.2023.10.003
Krek´o, J., Oblath, G. (2020). Economic growth and real exchange rate misalignments in the European Union. Acta Oeconomica, 70(3), 297-332. https://doi.org/10.1556/032.2020.00016
Lim, D. (1994). Explaining the growth performance of Asian developing economies. Economic Development and Cultural Change. 42(4), 829-844. DOI: 10.1086/452123
Loayza, N., Fajnzylber, P., Calderon, C. (2005). Economic growth in Latin America and the caribbean: Stylized facts, explanations and forecasts. Washington, D. C: World Bank. ISBN-10: 0-8213-6091-4
Mbaye, S. (2013). Currency undervaluation and growth: Is there a productivity channel? International Economics, 133, 8-28. https://doi.org/10.1016/j.inteco.2013.04.004
Naja, R. Y. W. (1998). Exchange rate misalignment and realignment. Cambridge. MA: Massachusetts Institute of Technology. https://dspace.mit.edu/bitstream/handle/1721.1/10127/39767693-MIT.pdf?sequence=2
Nyong, M. O. (2005). International economics: Theory, policy and applications. Calabar: Wusen Publishers Ltd. ISBN : 0199567093
Owoundi, F. (2015). Do exchange rate misalignments really affect economic growth? The case of Sub-Saharan African countries. International Economics, 145, 92-110. https://doi.org/10.1016/j.inteco.2015.10.001
Petreski, M. (2009). Exchange-rate regime and economic growth: a review of the theoretical and empirical literature. Economics Discussion Paper 2009-31. https://hdl.handle.net/10419/27729
Ramos-Herrera, M., Sosvilla-Rivero, S. (2023). Economic growth and deviations from the equilibrium exchange rate. International Review of Economics & Finance, 86, 764-786. https://doi.org/10.1016/j.iref.2023.03.028
Razin, O., & Collins, S. M. (1997). Real Exchange Rate Misalignments and Growth. NBER Working Paper No. 6174.
Ribeiro, R. S. M., McCombie, J. S. L., Lima, G. T. (2020).Does real exchange rate undervaluation really promote economic growth? Structural Change and Economic Dynamics, 52, 408-417. https://www.cedeplar.ufmg.br/pesquisas/td/TD%20574.pdf
Rodrik, D. (2008). The real exchange rate and economic growth: Theory and evidence (pp. 365–412). Brookings Papers on Economic Activity, 2, 365-412. DOI:10.1353/eca.0.0020
Sallenave, A. (2009). Real exchange rate misalignments and economic performance for the G20 countries. International Economics, 121, 59-80. https://doi.org/10.1016/S2110-7017(13)60008-6
Sargan, J. D. (1958), "The estimation of economic relationships using instrumental variables. Econometrica. 26, 393-415. https://doi.org/10.2307/1907619
Toulaboe, A. (2006). Real exchange rate misalignments and economic growth in developing countries. Southwestern Economic Review, 33, 57-74. https://swer.wtamu.edu/sites/default/files/Data/57-74-68-254-1-PB.pdf
Usalan, B. (2018). Real exchange rate misalignment and economic growth: An update. Ankara: Central Bank of the Republic of Turkey. Working Paper 1819. DOI:10.13140/RG.2.2.33856.46083
Published
How to Cite
Issue
Section
Copyright (c) 2025 Nahoussé Diabate
This work is licensed under a Creative Commons Attribution 4.0 International License.
Allows users to: distribute and copy the article; create extracts, abstracts, and other revised versions, adaptations or derivative works of or from an article (such as a translation); include in a collective work (such as an anthology); and text or data mine the article. These uses are permitted even for commercial purposes, provided the user: gives appropriate credit to the author(s) (with a link to the formal publication through the relevant URL ID); includes a link to the license; indicates if changes were made; and does not represent the author(s) as endorsing the adaptation of the article or modify the article in such a way as to damage the authors' honor or reputation. CC BY
