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The nexus between economic growth and conditional exchange rate volatility: evidence from emerging economies

Mudaser Ahad Bhat (Department of Economics, Higher Education Department of Jammu and Kashmir – GDC Khansahib, Budgam, India)
Aamir Jamal (Department of Economics, University of Kashmir, Srinagar, India)
Farhana Wani (Department of Economics, Central University of Kashmir, Ganderbal, India)

Journal of Economic and Administrative Sciences

ISSN: 2054-6238

Article publication date: 17 July 2024

86

Abstract

Purpose

The purpose of this paper was to examine the nexus between conditional exchange rate volatility and economic growth in BRICS countries. Further, the dynamic causation between economic growth and exchange rate volatility is also examined.

Design/methodology/approach

We employed three techniques, namely, dynamic panel models, static panel models and Dumitrescu and Hurlin (DH) panel causality test to examine the economic growth–conditional exchange rate volatility nexus in BRICS countries.

Findings

The overall results showed that conditional exchange rate volatility has a negative and significant effect on economic growth. Interestingly, the results showed that whenever the exchange rate volatility exceeds the 0–1.54 range, the economic growth of BRICS is reduced, on average, by 5%. Further, the results of the causality test reconciled with that of ARDL wherein unidirectional causality from exchange rate volatility, exports, labour force and gross capital formation to economic growth was found.

Research limitations/implications

The urgent recommendation is to develop and align fiscal, monetary, trade and exchange rate policies, either through creating a common currency region or through coordinated measures to offset volatility and trade risks in the long run. Further, to offset the impact of excessive exchange rate changes, BRICS economies can set up currency hedging systems, implement temporary capital controls during periods of extreme volatility or create currency swap agreements with other nations or regions. Last, but not least, investment and labour policies that are coherent and well-coordinated can support market stabilisation, promote investment and increase worker productivity and job prospects.

Originality/value

Researchers hold contrasting views regarding the effect of exchange rate volatility on economic growth. Some researchers claim that exchange rate volatility reduces growth, and several shreds of empirical evidence claim that lower exchange rate volatility is linked with an increase in economic growth, at least in the short run. However, the challenge lies in establishing the optimal range beyond which exchange rate volatility becomes detrimental to economic growth. The present study contributes to this aspect by seeking to identify the optimal spectrum beyond which excessive shifts in exchange rate volatility negatively affect economic growth, or endeavors to define the acceptable spectrum within which these fluctuations actually boost growth. To the best of our knowledge, this study is the first to analyse the given research area. The present study used a dummy variable technique to capture the impact of permissible exchange rate band on the economic growth.

Keywords

Acknowledgements

The author(s) received no financial support for the research, authorship and/or publication of this article.

Citation

Bhat, M.A., Jamal, A. and Wani, F. (2024), "The nexus between economic growth and conditional exchange rate volatility: evidence from emerging economies", Journal of Economic and Administrative Sciences, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JEAS-07-2023-0199

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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