Real Exchange Rate Volatility, Economic Growth and the Euro

Abstract

This paper studies the impact of real effective exchange rate volatility on economic growth as well as the euro's impact on real effective exchange rate volatility. We first show that after a plausible endogeneity correction, real effective exchange rate volatility is negatively associated with growth in a 1980~2011 panel of the OECD (Organization for Economic Cooperation and Development) countries. A one standard deviation volatility decrease is associated with a two percentage points growth increase. Second, we find that the euro adoption was associated with a decline of 0.4 standard deviations in long-run real effective exchange rate volatility before the Great Recession in 2008~2009. Moreover, while the Great Recession increased real effective exchange rate volatility by 38~189% of the sample mean for the countries outside the eurozone, the real effective exchange rate of the euro adopters were almost completely insulated. We conclude that real effective exchange rate stability may be growth-enhancing in the OECD countries and that the euro have played a growth-enhancing role at least before the recent eurozone debt crisis.

The Effect of Exchange Rate Volatility on Economic Growth: Case of the CEE Countries

“…Jamil et al (2012) examined the effect of volatility on growth during two periods for eleven European countries in the European Monetary Union and four countries that did not adopt the Euro as a common currency. The results are mixed for countries in the analysis, but the common currency decreases the harmful impact of exchange rate volatility on industrial production (Janus and Riera-Crichton 2015). Moreover, for Germany and Denmark, the impact of exchange rate volatility was negative for both periods, before and after the introduction of a common currency.…”

Financial system, trade concentration and economic growth in West African Monetary Zone (WAMZ)

“…Many literatures have pinpointed to the development of financial integration, sound financial institutions, markets and market infrastructure interconnectivity are some of the medium through which economic integration can impact growth. These literatures have also identified direct or indirect ways that economic blocs affect trade, financial institution, standard of livings and productivity growth within the economies in the blocs, (Lopez-Cordova & Moreira, 2003;Kamau, 2010;Bertola, 2010;Cornia, 2011;Gao, 2011;Eichengreen, 2012;Gehringer, 2013;Conti, 2014;Geda & Kebret, 2014;Schonfelder & Wagner 2015;Janus & Riera-Crichton, 2015;Konig, 2015;Mann, 2015;Anyanwu, 2015;Busemeyer & Tober, 2015;Mevel et al, 2016;Roy & Mathur, 2016;Kalaitzoglou & Durgheu, 2016;Soete and Hove, 2017;Baier et al, 2017;Jooji & Oguchi 2017;ECB, 2017;Klofat, 2017;Ehigiamusoe &Lean, 2018 andKizito andHooi, 2018). In a specific term Jones (2002) used a mixture of cross-sectional units and time series data to test for intersection in ECOWAS nations spanning from 1960-1990.…”

Depreciate to save the economy? An empirical evidence worldwide

“…Some studies concerned the impact of exchange rate fluctuation on growth. Janus and Riera‐Crichton (2015) explored the causality between real effective exchange rate volatility and growth with data on the OECD countries from 1980 to 2011. The result found that the relationship between the two is negative, and a decrease in one standard deviation of exchange rate fluctuation can increase growth by 2%.…”

“…The third conducts an empirical examination of the proposition econometrically. Some studies have supported the effect (Abida, 2011; Ahmad, Ahmad, & Ali, 2013; Elbadawi & Kaltani, 2011; Hausmann, Pritchett, & Rodrik, 2005; Papanikos, 2015; Rodrik, 2008), some rejected it (Fung, 2008; Tang, 2014), and some point to the stability of the exchange rate (Aghion, Bacchetta, Rancière, & Rogoff, 2009; Janus & Riera‐Crichton, 2015; Schnabl, 2008; Tharakan, 1999; Vieira, Holland, da Silva, & Bottecchia, 2013). Moreover, some have found the exchange rate to be a response to the economic situation, not only the cause (Doan & Gente, 2013; Kia, 2013; Schnatz, Vijselaar, & Osbat, 2004).…”