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Inferences on the Relationship Between Economic Growth and the Real Exchange Rate: A Meta-Analysis

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Determinants of Economic Growth in Africa

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Abstract

This study gives empirical evidence on the Balassa effect which represents the coefficient of the productivity growth variable in the relationship between productivity growth and the real exchange rate. A meta-analysis of 45 previous studies shows a large and significant magnitude of the Balassa effect under a random-effects model after correction for publication bias. Ceteris paribus, 78.68 percent of the size of the effect (effect size) of change in productivity growth was directly transmitted to the real exchange rate for countries in the sample studies. The publication bias test does not preclude the existence of an (inflated) effect size. About 63.86 percent of the variations in effect size are accounted for by differences in the sample size (precision), parameters and estimation methods used in the sample studies. The results of our study show that the marginal value of studies on the Balassa hypothesis is significantly different from zero. Therefore, policymakers should be aware of the impact of productivity growth on the real exchange rate while promoting policies of rapid economic growth.

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Notes

  1. 1.

    De Gregorio et al. (1994) shows a sector which exports more than 10 percent of its produce is referred to as ‘tradable’ otherwise ‘non-tradable.’

  2. 2.

    For jointly normally distributed variables, \( \frac{{r\sqrt {k - 1} }}{{\sqrt {1 - r^{2} } }}\sim t - distribution,\, k - 1 = {\text{df}} \) (Gujarati 2004).

  3. 3.

    Direct impact refers to the external version of the Balassa hypothesis which defines the real exchange rate directly in terms of productivity. The other version is called the internal Balassa hypothesis . It defines the real exchange rate indirectly in terms of relative price as a function of productivity.

  4. 4.

    A value between 0.33 and 0.17 represents a medium level effect and a value between 0.17 and 0.07 represents a weak effect. A value less than 0.07 is assumed to be insignificant.

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Acknowledgements

I am grateful for all comments and contributions by Professor Scott Hacker, Professor Par Sjolander and Dr. Girma Estiphanos. Their comments helped improve the paper.

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  1. Department of Economics, Addis Ababa University, Addis Ababa, Ethiopia

    Fentahun Baylie

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  1. Department of Economics, Sogang University, Seoul, Korea (Republic of)

    Almas Heshmati

Appendix A

Appendix A

See Tables 8, 9, 10, and 11.

Table 8 Correlation coefficients of relevant moderators
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Table 9 Regression results (including all moderators)
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Table 10 Joint test of publication bias
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Table 11 Tests of publication bias
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Baylie, F. (2018). Inferences on the Relationship Between Economic Growth and the Real Exchange Rate: A Meta-Analysis. In: Heshmati, A. (eds) Determinants of Economic Growth in Africa. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-76493-1_10

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  • DOI: https://doi.org/10.1007/978-3-319-76493-1_10

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