Economic growth and exchange rate uncertainty

Abstract

Recent research carried out within the framework of endogenous growth theory has confirmed the positive impact of the openness of an economy on its economic growth. This paper extends that line of investigation further and analyses the effect of exchange rate uncertainty (ERU) on growth. First, it is shown theoretically how ERU can adversely affect the endogenous growth process. Exchange rate uncertainty is then quantified for 21 OECD countries. Finally, panel regressions which use the above measures of ERU together with other determinants are carried out to explain the growth rates of the above group of countries. Results show that exchange rate uncertainty has a negative impact on long-term growth.