Fourie, Justin and Pretorius, Theuns and Harvey, Rhett and Henrico, Van Niekerk and Phiri, Andrew (2016): Nonlinear relationship between exchange rate volatility and economic growth: A South African perspective.
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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.
| Item Type: | MPRA Paper |
|---|---|
| Original Title: | Nonlinear relationship between exchange rate volatility and economic growth: A South African perspective |
| Language: | English |
| Keywords: | Exchange rates; economic growth, smooth transition regression (STR) model; thresholds; nonlinearity; volatility; South Africa; monetary policy; fiscal policy. |
| Subjects: | C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy F - International Economics > F3 - International Finance > F31 - Foreign Exchange O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General |
| Item ID: | 74671 |
| Depositing User: | Dr. Andrew Phiri |
| Date Deposited: | 22 Oct 2016 07:52 |
| Last Modified: | 26 Dec 2024 00:02 |
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| URI: | https://mpra.ub.uni-muenchen.de/id/eprint/74671 |
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