The Impact of Exchange Rate Volatility on Long-term Economic Growth: Insights from Lebanon

Audi, Marc (2024): The Impact of Exchange Rate Volatility on Long-term Economic Growth: Insights from Lebanon.

Abstract

There is ongoing debate in empirical research regarding the impact of exchange rate volatility on exports and economic growth. While some studies argue that exchange rate volatility positively influences these economic variables, others suggest negative or negligible effects. This study seeks to clarify this debate by examining the specific impact of exchange rate volatility on the economic growth of Lebanon, utilizing annual time series data spanning from 1980 to 2023. In our investigation, we employed several econometric techniques to analyze the relationship between exchange rate volatility and economic growth. Notably, we utilized the autoregressive distributed lag model to explore both the short-term and long-term dynamics between these variables. Our results reveal a nuanced relationship: in the long run, exchange rate volatility exhibits a positive and significant effect on economic growth, while in the short run, this relationship is negative and insignificant. Further analysis identified that variables such as exchange rate volatility, investment volatility, agricultural value-added, and services value-added significantly impact economic growth in the long run. In contrast, inflation and exchange rates were found to have an insignificant effect on long-term economic growth. Specifically, inflation displayed a negative and insignificant relationship with economic growth, suggesting that while inflation can hamper growth, its impact is not statistically significant in this context. Given the inherent challenges in eliminating exchange rate volatility, our study recommends that the government of Lebanon adopt efficient macroeconomic policies aimed at mitigating the adverse effects of currency volatility. These policies should focus on enhancing economic stability and fostering a conducive environment for sustainable growth. Our findings contribute to the broader discourse on exchange rate volatility and its economic implications, offering specific insights relevant to Lebanon and potentially applicable to other economies with similar characteristics. Policymakers can leverage these insights to design strategies that balance the benefits of exchange rate flexibility with the need to protect the economy from excessive volatility. The evidence provided enhances our understanding of the long-term and short-term effects of exchange rate fluctuations, offering a foundation for informed policy-making that promotes economic resilience and growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange Rate Volatility, Economic Growth, Lebanon
• Subjects: F - International Economics > F3 - International Finance > F31 - Foreign Exchange; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East

References

Ahmad, K., Ali, A., & Yang, M. (2022). The Effect of Trade Liberalization on Expenditure Structure of Pakistan. Bulletin of Business and Economics (BBE), 11(1), 73-84.

Alexey Yurievich Mikhaylov (2018). Volatility Spillover Effect between Stock and Exchange Rate in Oil Exporting Countries. International Journal of Energy Economics and Policy, 8(3), 321-326.

Ali, A. & Naeem, M.Z. (2017). Trade Liberalization and Fiscal Management of Pakistan: A Brief Overview. Policy Brief-Department of Economics, PU, Lahore. 2017 (1), 1-6.

Ali, A. . (2022). Foreign Debt, Financial Stability, Exchange Rate Volatility and Economic Growth in South Asian Countries. Journal of Business and Economic Options, 5(4), 26-34.

Ali, M. . (2018). Inflation, Interest and Exchange Rate Effect of the Stock Market Prices. Journal of Business and Economic Options, 1(2), 38-43.

Alzahrani, M. ., & Salah, O. B. . (2020). A Time Series Analysis of Bilateral Trade of India and Saudi Arabia. Journal of Business and Economic Options, 3(2), 72-82.

Andreou, E. . (2021). A Literature Survey Trade Policy Dynamics: Insights for Assessing Poverty and Inequality Impacts. Journal of Business and Economic Options, 4(4), 1-8.

Arshad, Z. ., & Mukhtar, S. . (2019). Understanding Pakistan’s Trade Dynamics: Import-Export Trends and Trade Balance Analysis. Journal of Business and Economic Options, 2(3), 115-122.

Asseery and D.A. Peel (1991). The effects of exchange rate volatility on exports, Elsevier Science Publishers B.V.

Aurangzeb, A., Stengos, T., & Mohammad, A. U. (2005). Short-run and long-run effects of exchange rate volatility on the volume of exports: a case study for Lebanon. International Journal of Business and Economics, 4(3), 209.

Axel Grossmanna, Inessa Love, Alexei G. Orlov (2014) the dynamics of exchange rate volatility: A panel VAR approach.

Bernardin Senadza and Desmond Delali Diaba (2017) Effect of exchange rate volatility on trade in Sub-Saharan Africa 10.

Chen Liminga, Du Ziqinga, and Hu Zhihaob (2019) Impact of economic policy uncertainty on exchange rate volatility of China.

Christine Sauer and Alok K. Bohara (2001). Exchange Rate Volatility and Exports: Regional Differences between Developing and Industrialized Countries. Review of International Economics, 9(1), 133–152, 2001

Cizakca, M. . (2024). Understanding the Determinants of Foreign Trade Volume in Turkiye: An Empirical Analysis. Journal of Business and Economic Options, 7(1), 19-28.

Dimitrios Serenis and Nicholas Tsounis (2014). Exchange Rate Volatility and Aggregate Exports: Evidence from Two Small Countries, Hindawi Publishing Corporation.

Duc Hong VO, Anh the VO and Zhaoyong Zhang (2019). Exchange Rate Volatility and Disaggregated Manufacturing Exports: Evidence from an Emerging Country. Risk Financial Manag, 12, 12.

Glauco de Vita and Andrew Abbott (2004). The Impact of Exchange Rate Volatility on UK Exports to EU Countries. Scottish Journal of Political Economy.

Hock-Tsen Wong and Hock-Ann Lee (2016). Exchange Rate Volatility and Exports of Malaysian Manufactured Goods to China: An Empirical Analysis, 145 – 159

Hwang, J. ., & Lee, Y. . (2019). Exploring the Impact of Trade Openness on Unemployment: A Cross-Country Analysis. Journal of Business and Economic Options, 2(3), 123-131.

Iqbal Mahmood, Major Ehsanullah, and Habib Ahmed (2011). Exchange Rate Volatility & Macroeconomic Variables in Pakistan, Business Management Dynamics, 2047-7031

Iqbal, K., & Raza, A. (2018). Impact of Foreign Exchange Rate Volatility on Money Demand in Pakistan: An Empirical Analysis. Journal of Policy Options, 1(3), 74-83.

Irfan, M. ., & Sohail, F. . (2021). Exploring Import-Export Dynamics: A Time Series Analysis of Pakistan’s Trade Trends. Journal of Business and Economic Options, 4(2), 24-29.

Kamal P. Upadhyaya, Dharmendra Dhakal and Franklin G. Mixon (2020). Exchange Rate Volatility and Exports: Some New Estimates from the Asean-5, the Journal of Developing Areas, 10.

Khalid, M. (2022). Dynamics of Export Demand Determinants in Pakistan: Exploring Exchange Rate Volatility and Economic Context. Journal of Business and Economic Options, 5(2), 36-40.

Khan, A. J., Azim, P., & Syed, S. H. (2014). The Impact of Exchange Rate Volatility on Trade.

Malik, F. (2019). Exchange Rate Regimes and Economic Dynamics: Insights from Pakistan. Journal of Business and Economic Options, 2(3), 132-141.

Mealli, F. . (2021). Currency Integration and Bilateral Trade: Evidence from the Eurozone. Journal of Business and Economic Options, 4(2), 30-34.

Mohsen Bahmani-Oskooee, Javed Iqbal and Muhammad Salam (2016). Short run and long run effects of exchange rate volatility on commodity trade between Pakistan and japan, Economic Analysis and Policy.

Mordecai, U. ., & Akinsola, A. . (2021). Navigating Economic Dynamics: Trade Liberalization and Demographic Trends in Nigeria. Journal of Business and Economic Options, 4(4), 30-36.

Mukesh Kumar, Azeema Begam and Nargis Noman (2020). the Impact of Currency Depreciation on Exports of Saarc Countries, 10.

Naik, P. K. . (2020). Exploring Factors Shaping India’s Trade Patterns: Evidence from Major Trading Partners. Journal of Business and Economic Options, 3(4), 150-157.

Olubiyi, E. A. . (2023). Determinants of Dividend Policy in Nigerian Stock Exchange Companies. Journal of Business and Economic Options, 6(3), 1-8.

Rana Ejaz Ali Khan, Rashid Sattar and Hafeez Ur Rehman (2012). Effectiveness of Exchange Rate in Pakistan: Causality Analysis 6(1), 83-96

Saang Joon Baak, M. A. Al-Mahmood & S. Vixathep (2014). Exchange rate volatility and exports from East Asian countries to Japan and the USA, 10.

Sarfaraz Ahmed Shaikh & Ouyang Hongbing (2015). Exchange Rate Volatility and Trade Flows: Evidence from China, Pakistan and India. International Journal of Economics and Finance, 10.

Shabana Parveen, Abdul Qayyum Khan and Muhammad Ismail (2012). Analysis of the Factors Affecting Exchange Rate Variability in Pakistan, 2223-9553.

Subhani, I. ., Iqbal, J. ., Jamil, F. ., & Iqbal, J. . (2022). Relevance of Earnings Metrics: A Comparative Analysis of EPS and CFO on the Pakistan Stock Exchange. Journal of Business and Economic Options, 5(4), 16-25.

Sun, Y. ., & Chang, Y. . (2020). Trade and Poverty in Developing Countries: Beyond Assumptions to Nuanced Understanding. Journal of Business and Economic Options, 3(4), 167-175.

Titus O. Awokuse & Yan Yuan (2006). the Impact of Exchange Rate Volatility on U.S. Poultry Exports 0.1002/agr.20082

Toseef Azid, Muhammad Jamil, and Aneela Kousar (2005), Impact of Exchange Rate Volatility on Growth and Economic Performance: A Case Study of Pakistan, 1973–2003, Pakistan Development Review, 749–775

Van Chien NGUYEN and Thi Tuyet DO (2020) Impact of Exchange Rate Shocks, Inward FDI and Import on Export Performance: A Cointegration Analysis. Journal of Asian Finance, Economics and Business,10.

Vinh Nguyen Thi Thuy and Duong Trinh Thi Thuy (2019). the Impact of Exchange Rate Volatility on Exports in Vietnam: A Bounds Testing Approach, 10.

W. L. Chou (2000) Exchange Rate Variability and China’s Exports. Journal of Comparative Economics.

Wang, Y. . (2023). Geopolitical Considerations in Sino-US Trade Relations. Journal of Business and Economic Options, 6(3), 17-25.

Yin-Wong Cheung and Rajeswari Sengupta (2013). Impact of exchange rate movements on exports: An analysis of Indian non-financial sector firms, 1456-5889

Zahid, M. (2018). Economic Misery, Exchange Rate, Interest Rate, and Foreign Direct Investment: Empirical Evidence from Pakistan. Journal of Policy Options, 1(2).

Zouhair Mrabet & Mouyad Alsamara (2017). the impact of parallel market exchange rate volatility and oil exports on real GDP in Syria: Evidence from the ARDL approach.