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Nonlinear Relationship between Exchange Rate Volatility and Economic Growth

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  • Andrew Phiri

Abstract

In this paper, we challenge the traditional assumption of a linear relationship between exchange rate volatility and economic growth in South Africa. By using data collected from 1970 to 2016 applied to a smooth transition regression (STR) model, we are able to prove that the exchange rate-economic growth correlation is indeed nonlinear within the sampled time period. In particular, we find that regime switching behaviour is facilitated by government size in which exchange rate volatility positively and significantly influences economic growth when growth in government spending is below 6 percent. Above this 6 percent threshold, volatility exerts an insignificant effect on economic growth. In light of the adoption of a free floating exchange rate regime by the Reserve Bank, our results emphasize the importance of the role which fiscal authorities play on the extent to which exchange rate movements affect economic growth.

Suggested Citation

  • Andrew Phiri, 2018. "Nonlinear Relationship between Exchange Rate Volatility and Economic Growth," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 61(3), pages 15-38.
    • Handle: RePEc:eei:journl:v:61:y:2018:i:3:p:15-38
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    Cited by:

    1. Tule Kpughur Moses & Oboh Ugbem Victor & Ebuh Godday Uwawunkonye & Onipede Samuel Fumilade & Gbadebo Nathaniel, 2020. "Does Exchange Rate Volatility Affect Economic Growth in Nigeria?," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(7), pages 1-54, July.
    2. Muhammed Adamu Obomeghie & David Umoru, 2024. "Devaluation, Goods Price Variation, And Gdp Growth," Journal of Academic Research in Economics, Spiru Haret University, Faculty of Accounting and Financial Management Constanta, vol. 16(2 (July)), pages 273-311.
    3. Ebenezer Olamide & Kanayo Ogujiuba & Andrew Maredza, 2022. "Exchange Rate Volatility, Inflation and Economic Growth in Developing Countries: Panel Data Approach for SADC," Economies, MDPI, vol. 10(3), pages 1-19, March.

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    Keywords

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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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