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

  • Fentahun Baylie
Chapter

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.

Keywords

Meta-analysis Balassa hypothesis Productivity growth Real exchange rate 

JEL Classification Codes

F31 F43 O11 O47 O57 

Notes

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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Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Fentahun Baylie
    • 1
  1. 1.Department of EconomicsAddis Ababa UniversityAddis AbabaEthiopia

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