Impact of Exchange Rate Movement on Economic Growth

Running head: IMPACT OF EXCHNAGE RATE MOVEMENT ON ECONOMIC GROWTH
Impact of Exchnage Rate Movement on Economic Growth
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IMPACT OF EXCHNAGE RATE MOVEMENT ON ECONOMIC GROWTH1
Table of Contents
Introduction......................................................................................................................................2
Literature Review............................................................................................................................2
Impact of exchange rate movement of economic activity...........................................................2
Exchange rate and economic growth...........................................................................................3
Exchange rate and long term economic growth..........................................................................3
Impact of exchange rate on output growth..................................................................................4
Data..................................................................................................................................................4
Methodology....................................................................................................................................5
Result and Analysis.........................................................................................................................6
Descriptive Statistics...................................................................................................................6
Scatter plot...................................................................................................................................7
Correlation Analysis....................................................................................................................7
Regression Analysis.....................................................................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

IMPACT OF EXCHNAGE RATE MOVEMENT ON ECONOMIC GROWTH2
Introduction
It is since the introduction of idea of globalization that countries become interdependent
on each other either by means of trade or any other cross border activities. The degree of
openness of a nation is reflected in terms of openness towards international trade. In establishing
integration of domestic market of an economy with the international market exchange rate plays
a critical role. Exchange rate formally represents price of currency of one country relative to
other country (Uribe & Schmitt-Grohe, 2017). It is an important determinant of real value of
currency of a nation. Since exchange rate determines relative price of export and import in the
international market volume of trade and economic activities depend on exchange rate between
nations. United States is one of the biggest and most open economy in the world (ustr.gov,
2020). The nation is the largest importer and exporter of goods and services. In driving economic
growth of United States international trade plays a crucial role. A significant portion of total
trade of United States takes place with different countries in Euro area. Considering this
background, the research paper aims to find the impact of movement of exchange rate between
United States and Euro on economic growth of United States.
Literature Review
Impact of exchange rate movement of economic activity
There are both theoretical and empirical literatures to assess the impact of exchange rate
movement on economic growth of a nation. There are studies which conclude a largely volatile
exchange rate is harmful for domestic economic activities. As against these findings, there are
studies showing that impact of a volatility in exchange rate on the domestic economy is subject
to the manner following which prices in the international market are set. There exit two sets of

IMPACT OF EXCHNAGE RATE MOVEMENT ON ECONOMIC GROWTH3
argument regarding benefits of depreciation or appreciation of a currency. According to the first
view, depreciation of exchange rate has a beneficial impact on real output of the nation. This is
known as expansionary view related to depreciation of currency. There is however another view
arguing that depreciation of a currency has a contractionary impact which is harmful for real
output of the nation (Lubis et al., 2017). Like theory, ambiguity also exits among empirical
literatures regarding the impact of exchange rate movement on economic growth of a nation.
Exchange rate and economic growth
One paper attempted to investigate the impact of volatility in exchange rate on economic
growth by taking 95 sample developing nations. The paper concluded that the relation between
exchange rate movement and economic growth is negative. In support of this finding, another
paper showed that economic growth is likely to fall with volatility in real exchange rate through
the channel of a lower growth in total factor productivity (Alagidede & Ibrahim, 2017). A similar
study based on 22 sample nations attempted to find the association between exchange rate
volatility and growth of real output and inflation. Authors of the paper arrived at the conclusion
that given degree of openness, volatility in the exchange rate particularly depreciation harms
economic performance of a nation by adversely affecting growth of output and movement of
price level (Isola et al., 2016). In the long run an anticipated fluctuation in the exchange rate was
found to considerably increase inflation and decreases growth of output.
Exchange rate and long term economic growth
In the paper developed by Holland et al. (2011), the impact of volatility in exchange rate
on economic growth in the long run was examined considering developed and advanced
countries. The sample period for this paper was between 1970 and 2009. This paper showed that