UPSI Digital Repository (UDRep)
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Abstract : Universiti Pendidikan Sultan Idris |
This study examines the effects of exchange rate depreciation on economic performance, which
indirectly affects economic growth and poverty reduction in 11 developing countries by using annual
data during 1980-2016. Three methods of analysis, namely Autoregressive Distributed Lag (ARDL),
Fully Modified Ordinary Least Squares (FMOLS), and Panel Autoregressive Distributed Lag (P-ARDL)
applied for analysing eight models constructed. The nominal exchange rate is the main interest
variable in the economic performance model. Foreign direct investment, international reserve, and
trade balance are the main interest variables in the economic growth model and poverty reduction
model, respectively. By considering the incidence of the structural break, the results of
time-series analysis using the ARDL method shows that the nominal exchange rate contributes
positively to foreign direct investment in 7 countries. The results also show the nominal exchange
rate negatively affects international reserve in the short run, then has a positive effect in the
long-run in 5 countries. Other findings of the study prove that the nominal exchange rate improves
trade balance in the short-run, but it worsens trade balance in the long-run in 8 countries. Having
Cumulative Sum (CUSUM) and Cumulative Sum of Squares (CUSUMSQ) tests, the results show that the
structures of three models of economic performance are stable. The results of FMOLS show a negative
long-run relationship between gross domestic product and foreign direct investment as well as
international reserve, but a positive long-run relationship between gross domestic product and
trade balance. The results of P-ARDL show that per capita income is influenced positively by
foreign direct investment, international reserve, trade balance, and remittance. This study calls
for a rethinking of the importance of foreign direct investment and international reserve in
boosting economic growth. The developing countries should rethink the negative-sides incurred for
economic growth rather than pursuing foreign
direct investment and hoarding international reserves.
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