The Asymmetric Indirect Impact of Real Exchange Rate on Economic Growth through Foreign Trade: An Asymmetric ARDL Panel Model

Abstract

This paper aims to examine the combined effect of trade openness and real exchange rate on economic growth. We use an asymmetric ARDL panel model on a sample of Middle Eastern and North African (MENA) countries with data from 1990 to 2018. The results of the linear model prove, for the long-run component, that all variables, except government consumption, are significant. In addition, the interaction term between trade openness and the real exchange rate is negative and has a significant impact on economic growth at the 5% level. The results of the short-run component show that all variables are significant. The error correction adjustment coefficient is, however, negative but not significant. As a result, the linear model cannot be used to adjust the variables of the short-run dynamic to long-run equilibrium. The findings of the nonlinear model point to a positive and significant asymmetric effect of the interaction variable for both upward and downward movements on the economic growth in the long run. In other words, the findings of the study suggest that trade openness and real exchange rate need to be combined to enhance GDP growth. The results of the nonlinear short run component show that the impact of the interaction term between trade openness and real exchange rate on economic growth is significantly negative for both positive and negative variations.