Abstract
This paper investigates the link between real exchange rate misalignment and Southern African countries' economic growth. The study used panel data for 16 Southern African countries over 17 years. Generalized methods of moments (GMM) was applied to analyze the panel growth equation. The estimated results have suggested that the real exchange rate, real exchange rate misalignment, terms of trade, and foreign direct investment explains variation in income growth of southern African countries. The real exchange rate appreciation over the study period has adversely affected growth, whereas real exchange rate undervaluation suggests a positive impact on annual income growth. Unfavourable terms of trade were found to hurt growth, whereas foreign direct investment upsurge stimulates growth. Thus, policymakers in their respective African countries ought to diligently monitor real exchange rate misalignment in the foreign exchange market. An increase in real exchange rate overvaluation may adversely affect the trade and current account balances, which might ultimately hurt growth.
Highlights
Money plays a central role in facilitating the exchange of goods and services within and between countries
The results indicate that unfavorable terms of trade negatively affect economies in southern African countries
The growth regression model results suggest that the real exchange rate, real exchange rate misalignment, terms of trade, and foreign direct investment explain most of the variations in the income growth of southern African countries
Summary
Money plays a central role in facilitating the exchange of goods and services within and between countries. Darvas (2012) mentioned that the real exchange rate serves many purposes, such as assessing the currency's equilibrium value, cost competitiveness, the drivers of trade flows, and or incentives for reallocation of production between the tradable and the non-tradable goods sectors (Tsangarides, 2011). All these transactions reflect the transfer of money from one currency into another, respond to economic incentives, and optimise economic agents (Rose, Lockwood, & Quah, 2000). Several studies have shown that in most countries, periods of fast growth are associated with undervaluation but with no evidence of non-linearity between growth and real exchange rate movements (Rodrik, 2008)
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