THE EFFECTS OF EXCHANGE RATE ON ECONOMIC GROWTH IN THE REPUBLIC OF MACEDONIA

Nasir SELIMI, Valdrina SELIMI

Abstract


The purpose of this paper is to analyse empirically the effects of exchange rate on economic growth in the FYROM. We apply the OLS approach to estimate the regression equation and present the model that analyzes the impacts of exchange rate on economic growth. As the dependent variable is considered real GDP as representatives of economic growth, and as independent variables besides the variable of real exchange rate, are reviewed a range of other macroeconomic variables like consumer price index, trade openness, the monetary aggregate (M2), current account balance and real interest rate. Also in the model is incorporated an artificial variable (dummy) to explore the effects of the global financial crises. Further, it is made a long-term analysis of the linkage between real exchange rate and economic growth, using dynamic VAR model and Granger causality test.

The empirical results indicate that real exchange rate positively affects the economic growth. Thus, we found out relevant argument that support the current regime i.e. fix regime of the exchange rate which ensures macroeconomic stability of the country. Taking into consideration the euroization, exchange rate pass through effect and credibility, introducing a float exchange regime is likely to induce more costs than benefits for the economy, as the global financial crisis of 2008 proved that still country face the lack of complete credibility of the national currency, monetary and fiscal policies.


This is one of a rare attempt of estimating the effects of exchange rate on economic growth in FYROM using the VAR model and Granger causality test. Although the VAR model and Granger causality test performs well, the results should be interpreted with caution.


Keywords


Exchange rate, economic growth, OLS, Granger causality test

References


Besimi, F. (2003), “Variability of exchange rate and intenational trade – the experience of Republic of Macedonia”, NBM-Economic Research, pp 3-17.

Campa, J.M., and Goldberg, L.S. (2005),“Exchange rate pass-through into import prices. The review of economics and statistics”. MIT Press,Vol.87, No.4, pp.679–690

Coricelli, F., Jazbec B., andMasten I. (2004),“Exchange rate pass-through in acceding countries: the role of exchange rate regimes”. European University Institute, Working Paper, No. 2004/16, pp 1–32.

Fetai, B. (2013), “Exchange Rate Pass-Through in Transition Economies: The Case of Republic of Macedonia”, Transition Studies Review, Vol.20, No. 3, pp 309-324.

Ganev, G., Molnar K., Rybinski, K., and Wozniak, P. (2002),“Transmission mechanisms of monetary policy in central and eastern Europe”, Central for social and economic research, Case Reports No. 0052, Warsaw, pp 1–28.

Jovanovic, B. (2007), “The Fundamental Equilibrium Exchange Rate of the Denar”, Unpublished Master’s thesis, Staffordshire University, UK.

Jovanovic, B. (2009), “Should the Macedonian Denar be Devaluated? Some Evidence from the Trade Equations”, SEER: Journal for Labour and Social Affairs in Eastern Europe, Vol. 12, No. 3, pp.339-368.

Kurtishi-Kastrati, S.,Ramadani, V., Dana, L-P. and Ratten, V. (2016),“Do foreign direct investmentsaccelerate economic growth? The case of the Republic of Macedonia”, Int. J.Competitiveness, Vol. 1, No. 1, pp.71–98.

Nenovski T. and Makrevska E. (2009), “Influence of the Economic Crisis on the Exchange Rates of the Countries from Eastern and Central Europe”, American College, Skopje.

Selimi, N., Sadiku, M and Sadiku, L. (2016). “The Impact of Foreign Direct Investments on the Economic Growth of Macedonia”. 3-rd International Multidisciplinary Scientific Conference on Social Sciences and Arts, SGEM2016, Economics and Tourism, pp. 749-756. STEF92 Technology Ltd, Sofia, Bulgaria.

Alguacil, M. and Orts, V. (2002), 'A Multivariate Cointegrated Model Testing for Temporal Causality between Exports and Outward Foreign Investment: the Spanish Case', Applied Economics, 34, 119-132.

Clausing, K. A. (2000), 'Does Multinational Activity Displace Trade', Economic Inquiry, 38(2), 190-205.

Darvas, Zsolt (2012), “Real effective exchange rates for 178 countries: A new database”, Working Paper 2010/06, Bruegel; Discussion paper 2012/10

Fontagné, L. and Pajot, M. (1997), 'Relationships between Trade and FDI Flows within two Panels of US and French Industries', Working Paper of the University of Paris 1.

Hoekman, B. and Djankov, S. (1997). “Determinants of Export Structure of Countries in Central and Eastern Europe”, The World Bank Economic Review, 11(3): 471-487.


Full Text: PDF

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.