Real exchange rate effect on economic growth: comparison of fundamental equilibrium exchange rate and Balassa–Samuelson based Rodrik approach

Figures & data

Table 1. Theoretical expectations

Explanatory Variable	Expected Sign	Explanatory Variable	Expected Sign
RGDPPC	-	GOVT	-
UNDERVAL	+	INVT	+
TOT	+	INF	-
OPEN	+	LIFE	+

Table 2. Panel data unit root test (level data)

Variable	IPSTest Statistic(P-Value)	LLCTest Statistic(P-Value)	ADF-FisherTest Statistic(P-Value)
Growth	-16.2854(0.00)*	-15.6194(0.00)	622.193(0.00)
RGDPPC	7.3873(1.00)	0.2915(0.61)	61.169(1.00)
RER	-2.00318(0.02)	-2.79415(0.00)	269.497(0.00)
TOT	-7.38316(0.00)	-7.97885(0.00)	405.101(0.00)
OPEN	-0.9552(0.01)	-2.1426(0.01)	196.301(0.02)
GOVT	-6.1243(0.00)	-5.6963(0.00)	282.632(0.00)
INVT	-5.3586(0.00)	-3.5279(0.00)	302.463(0.00)
INF	-20.1296(0.00)	-22.8700(0.00)	693.592(0.00)
LIFE	-9.9254(0.00)	-24.0886(0.00)	586.411(0.00)

Source: Author’s computation. *Null hypothesis is that there exists unit root.

Table 3. Estimation of equilibrium level for RER

Dependent variable: real exchange rate
	Balassa–Samuelson(BS)	Fundamental Equilibrium Exchange Rate (FEER)
Ln(RGDPPC)	−0.07365 (−2.537556)*	−0.08706 (−2.106156)**
Ln(TOT)		−0.07625 (2.353947)**
OPEN		0.01750 (2.380280)**
GOVT		0.0293 (2.13193)**
INVT		−0.44040 (−8.017593)*

Source: Author’s computation. Note 1: the number in parenthesis are t-statistics. Note 2: (*), (**) and (***) indicate that the estimated parameters are significant at the 1%, 5%, and 10% significance level respectively.

Table 4. Estimating the growth models

Dependent Variable: Growth (RGDP Growth Rate)
	Initial Rodrik Growth model	Augmented Growth (BS-approach)	Augmented Growth (FEER-approach)
Lag of growth		0.066378 (42.59829)*	0.056282 (26.98620)*
Ln (RGDPPC)	−0.65915 (−271.3714)*	−0.79738(−50.02754)*	−0.7680357 (−39.25344)*
Ln (Underval^BS)	0.022504 (49.61075)*	0.022007 (6.628207)*
Ln (Underval^FEER)			0.067886 (14.50232)*
Ln (TOT)		0.409500 (5.330905)*	0.278745 (2.678558)*
OPEN		0.051521 (48.16377)*	0.052211 (45.11895)*
GOVT		−0.758011 (−44.63065)*	−0.837546 (−32.30611)*
INVT		0.154141 (124.6659)*	0.147419 (122.3304)*
Ln (INF)		−0.11526 (−40.70463)*	−0.11125 (−42.58425)*
Ln (LIFE)		0.03753 (3.991404)*	0.051097 (3.704361)*
Time Dummies	Yes	Yes	Yes
Country Dummies	Yes	Yes	Yes

Source: Author’s computation. Note 1: the number in parenthesis are t-statistics. Note 2: (*), (**) and (***) indicate that the estimated parameters are significant at the 1%, 5%, and 10% significance level respectively.

Table 5. Estimating the growth models (lags of undervaluation included)

Dependent variable: Growth (Real GDP Growth Rate)
	Balassa–Samuelson (BS)	Fundamental equilibrium exchange rate (FEER)
Lag of growth	0.080532 (3.200852)*	0.066378 (2.578059)*
Ln (RGDPPC)	−0.567079 (−8.447694)*	−0.704878 (−11.75093)*
Ln (underval^BS)	0.049007 (6.878234)*
Ln (underval^BS, first lag)	0.045055 (3.161220)*
Ln (underval^BS, second lag)	−0.010895(−0.875955)
Ln (underval^FEER)		0.05312030 (1.96230)**
Ln (underval^FEER, first lag)		0.068762 (2.507721)**
Ln (underval^FEER, second lag)		−0.064953 (−1.458096)
Ln (TOT)	0.335980 (1.985105)**	0.318136 (1.987476)**
OPEN	0.052030 (5.806908)*	0.054152 (5.873012)*
GOVT	−0.806478 (−10.55525)*	−0.857318 (−10.82669)*
INVT	0.173679 (8.021967)*	0.162230 (6.438624)*
Ln (INF)	−0.092598 (−6.877168)*	−0.09125293 (−6.584923)*
Ln (LIFE)	0.060348 (2.963552)*	0.094059 (4.302232)*
Time Dummies	Yes	Yes
Country Dummies	Yes	Yes

Source: Author’s computation. Note 1: the number in parenthesis are t-statistics. Note 2: (*), (**) and (***) indicate that the estimated parameters are significant at the 1%, 5%, and 10% significance level respectively.