Real exchange rate effect on economic growth according to Rodrik model, Evidence from variable rank ordering analysis

Mehdi Seraj, Cagay Coskuner, Seyi Saint Akadiri, Amin Fahimi

Abstract


This research evaluate the impact of the real exchange rate on economic growth using Feature Selection (FS) to evaluate the optimal model and most influencing factor of economic growth for three  different economics; developed country, emerging market and developing countries. We used seasonal data from 1990 till 2016 and machining learning approach to empirically evaluate Rodrik work for first time. According to Feature Selection, we conclude that, GDP per capita play a significant role on economic growth of developed countries and emerging market, while in the developing countries, real exchange rate is a crucial variable for growth. Additionally, we compare the effect of exchange rate undervaluation on growth with two different effects, Balassa-Samuelson and fundamental equilibrium exchange rate. Findings from the study revealed that exchange rate undervaluation has a positive effect on economic growth for 93 countries include of 70 developing countries and 23 developed countries from 1990 till 2016.

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