Influence of Real Exchange Rate on the Finance-Growth Nexus in the West African Region

Kizito Ehigiamusoe,Hooi Lean

doi:10.3390/economies7010023

Kizito Ehigiamusoe, Hooi Lean

Open Access

https://doi.org/10.3390/economies7010023

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Journal: Economies	Publication Date: Mar 25, 2019
Citations: 19	License type: CC BY 4.0

Affiliation: Taylor's University, Universiti Sains Malaysia

Abstract

This study examines the moderating effects of the real exchange rate and its volatility on the finance-growth nexus in the West African region. It also determines the marginal effects of financial development on economic growth at various levels of the real exchange rates and its volatility. The findings show that financial development has a long-term positive impact on economic growth, but this impact is weakened by real exchange rate and its volatility. The marginal effects of financial development on economic growth vary with the levels of the real exchange rate and its volatility. The higher the real exchange rate and its volatility, the less finance spurs growth. We also provide evidence of this scenario in individual specific countries in the region. The implication of this study is that the development of the financial sector would not provide the desirable economic benefits except it is accompanied by a reduction and stability in the real exchange rates. Based on the findings, the study makes some policy recommendations.

Highlights

Some empirical studies have emphasized the fundamental role of institutional quality, level of financial development, per capita income and inflation in moderating the impact of financial development on economic growth in developed and developing countries (e.g., Arcand et al 2015; Ehigiamusoe et al 2018; Law et al 2018; Law and Singh 2014)
The interaction term between financial development and real exchange rate is included in the model, and we find that the interaction term enters with a negative coefficient, in both the long term and short term, while the coefficient of financial development remains positive
The linear real exchange rate is included in the model, and the results reveal that both the linear real exchange rate and the interaction term enter with negative coefficients in both the short term and long term, while the coefficient of financial development remains positive

Summary

Introduction

Some empirical studies have emphasized the fundamental role of institutional quality, level of financial development, per capita income and inflation in moderating the impact of financial development on economic growth in developed and developing countries (e.g., Arcand et al 2015; Ehigiamusoe et al 2018; Law et al 2018; Law and Singh 2014). The role of the real exchange rate or its volatility on the finance-growth nexus has not been thoroughly explored. The economic benefits of financial development could vary with the level of the real exchange rate. This is because real exchange rate has the capacity to influence economic growth. Some studies reported that real exchange rate has a positive impact on economic growth (e.g., Razmi et al 2012; Rodrik 2008; Tarawalie 2010), whereas other studies documented a negative linkage Comunale (2017) noted that exchange rate volatility does not have any robust effect on GDP growth

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Conclusion