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Exchange Rate Channel and Economic Growth: Empirical Investigation in a Developing Country’s Setup

Author

Listed:
  • Salman Ali Shah

    (Huazhong University of Science and Technology, Wuhan, Hubei, P.R China)

  • Chen He

    (Huazhong University of Science and Technology, Wuhan, Hubei, P.R China)

  • Mao Yu

    (Huazhong University of Science and Technology, Wuhan, Hubei, P.R China)

  • Wang Xiaoqin

    (Huazhong University of Science and Technology, Wuhan, Hubei, P.R China)

Abstract

Developing economies are different than developed economies in many aspects, i.e., in terms of institutional framework and political situation etc. Thus, the monetary policy needed in developing countries is also different than developed countries. The goal of this study is to investigate exchange rate channel of monetary transmission mechanism in a developing country’s setup. The variables included in our analysis are interest rate, exchange rate, exports, consumer price index and gross domestic product. Johansen cointegration technique is applied to analyze the long run relationship among variables while multivariate VECM granger causality test is used to explore the direction of causality among the set of our variables. We use annual data ranging from 1980 to 2015 while taking account of the limitations of time series data. Our findings suggest that output has a negative long run relationship with exchange rate and interest rate, positive relationship with exports and no statistically significant relationship with inflation. Interest rate granger causes all four of our variables thus showing the power of this policy tool. Exchange rate causes exports, consumer price index and output which means exchange rate is the second most powerful variable in our analysis. Output is granger caused by interest rate, exports and exchange rate which confirms the sensitivity of output to these variables. Consumer price index is granger caused by all four of our variables and came out to be the most sensitive variable in our analysis.

Suggested Citation

  • Salman Ali Shah & Chen He & Mao Yu & Wang Xiaoqin, 2016. "Exchange Rate Channel and Economic Growth: Empirical Investigation in a Developing Country’s Setup," International Journal of World Policy and Development Studies, Academic Research Publishing Group, vol. 2(9), pages 69-74, 09-2016.
    • Handle: RePEc:arp:ijwpds:2016:p:69-74
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    References listed on IDEAS

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