Currency Crosscurrents: Nominal Exchange Rate and US Economic Growth (1960-2024)
DOI:
https://doi.org/10.55677/SSHRB/2025-3050-0202Keywords:
ARDL Bounds cointegration, Currency Crosscurrents, ML Condition, SAM-Balassa hypothesis, Impact channels, Bretton Woods, Floating Exchange ratesAbstract
This research delves into the intricate relationship between nominal exchange rate and US GDP growth from 1960 to 2024. This study establishes a comprehensive analytical foundation through the lens of key theoretical frameworks, including the Marshall-Lerner condition, the Balassa-Samuelson hypothesis, and the monetary policy transmission mechanism. Rigorous pre-estimation tests and the Autoregressive Distributed Lag (ARDL) model reveal that exchange rates have a substantial long-term positive impact on GDP growth, validating concepts such as import substitution and the J-curve effect. Conversely, inflation emerges as a significant detriment to GDP growth, while interest rates and imports show positive short-term effects, driven by factors like enhanced investment, consumption, and technological advancements. Debt is identified as harming GDP growth in both short and long-term horizons and the model’s high explanatory power, accounting for 81.62% of the variation in US GDP growth, underscores the profound linkage between exchange rate management and economic stability. Additionally, this study identifies key policy implications for the Federal Reserve and the U.S. Treasury, effective inflation control through monetary tools, proactive exchange rate management via forward guidance and interventions, and fiscal responsibility, including supply-side reforms and coordinated fiscal policies, are paramount.
References
Barguellil, A., Ben-Salha, O., & Zmami, M. (2018). Exchange rate volatility and economic growth. The Journal of Economic Integration, 33(2), 1302-1336.
Balassa, B. (1964). The purchasing-power parity doctrine: a reappraisal. Journal of Political Economy, 72(6), 584-596.
Barro, R. J., & Sala-i-Martin, X. (2004). Economic growth. MIT Press.
Bernanke, B. S., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4), 27-48
Bernanke, B. S. (2013). The Federal Reserve and the Financial Crisis. Princeton University Press.
Blinder, A. S., & Solow, R. M. (1973). Does Fiscal Policy Matter? Journal of Public Economics, 2(4), 319-337.
Branson, W. H. (1977). Asset markets and relative prices in exchange rate determination. Weltwirtschaftliches Archive, 113(4), 688-722.
Branson, W. H. (1983). Macroeconomic determinants of real exchange rate risk. In R. J. Herring (Ed.), Managing Foreign Exchange Rate Risk. Cambridge University Press.
Caves, R. E. (1996). Multinational Enterprise and Economic Analysis. Cambridge University Press.
Clarida, R. H., Galí, J., & Gertler, M. (2021). The science and art of monetary policy: New Keynesian perspectives. Journal of Economic Literature, 59(1), 3-76.
Enders, W. (2010). Applied econometric time series. John Wiley & Sons.
Eichengreen, B. (2008). Globalizing capital: A history of the international monetary system (2nd ed.). Princeton University Press
Federal Reserve History. (2010). Nixon and the End of the Bretton Woods System, 1971–1973.
Feenstra, R. C. (2015).8 Advanced international trade: Theory and evidence. Princeton University Press.
Fisher, I. (1930). The Theory of Interest. New York: Macmillan.
Friedman, M. (1963). A Monetary History of the United States, 1867-1960. Princeton University Press.
Garber, P. M. (1993). The Collapse of the Bretton Woods Fixed Exchange Rate System. In M. D. Bordo & B. Eichengreen (Eds.), A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform (pp. 461-494). University of Chicago Press.
Ghosh, A. R., Ostry, J. D., & Qureshi, M. S. (2014). Exchange rate management and crisis susceptibility: A reassessment (IMF Working Paper No. 14/11). International Monetary Fund.
Ghosh, A. R., Ostry, J. D., & Qureshi, M. S. (2017). Exchange rate management and crisis susceptibility: A reassessment. Journal of International Economics, 108, 1-21.
Gujarati, D. N., & Porter, D. C. (2009). Basic econometrics (5th ed.). McGraw-Hill Irwin.
Hamilton, J. D. (1994). Time series analysis. Princeton University Press.
Hanson, S. G., Kashyap, A. K., & Stein, J. C. (2011). A Macroprudential Approach to Financial Regulation. Journal of Economic Perspectives, 25(1), 3-28.
Hoang, T. T., Nguyen Thi, V. A., & Minh, H. D. (2020). The impact of exchange rate on inflation and economic growth in Vietnam. International Journal of Business and Economics Research, 9(2), 116-125.
Humpage, O. (2010). The Smithsonian Agreement. Federal Reserve History.
Kutner, M. H., Nachtsheim, C. J., Neter, J., & Li, W. (2004). Applied linear statistical models (5th ed.). McGraw-Hill Irwin.
Krugman, P. R. (1991). The Move Toward Free Trade Zones. In Policy Implications of Trade and Currency Zones. Federal Reserve Bank of Kansas City.
Krugman, P., & Obstfeld, M. (2009). International economics: Theory and policy. Pearson Education.
Krugman, P. R., & Obstfeld, M. (2003). International Economics: Theory and Policy. Addison-Wesley.
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.
Laffer, A. B. (2004). The Laffer Curve: Past, Present, and Future. The Heritage Foundation.
Levy-Yeyati, E., & Sturzenegger, F. (2003). To float or to fix: Evidence on the impact of exchange rate regimes on growth. American Economic Review, 93(4), 1173-1193.
Lee & Yue. (2017). Impacts of the US dollar (USD) exchange rate on economic growth and the environment in the United States. Energy Economics, Volume 64, pages 170-176, ISSN 0140-9883. https://doi.org/10.1016/j.eneco.2017.03.006.
Morina, F., Hysa, E., & Voica, M. C. (2015). The effect of exchange rate volatility on economic growth: Case of the CEE countries. Procedia Economics and Finance, 26, 467-473.
Mankiw, N. G. (2014). Macroeconomics. Worth Publishers.
Marshall, A. (1890). Principles of Economics. Macmillan and Co., Ltd. Lerner, A. P. (1944). The Economics of Control: Principles of Welfare Economics. Macmillan.
McCauley, R. N., & Schenk, C. R. (2020). Central bank swaps then and now: swaps and dollar liquidity in the 1960s. BIS Working Papers, No 851.
Mishkin, F. S. (2016). The economics of money, banking, and financial markets. Pearson.
Mishkin, F. S. (1995). Symposium on the Monetary Transmission Mechanism. Journal of Economic Perspectives, 9(4), 3-10. Taylor, J. B. (1993). Discretion versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195-214.
Obstfeld, M. (1985). Floating Exchange Rates: Experience and Prospects. Brookings Papers on Economic Activity, 2:1985.
Obstfeld, M. (2020). International finance. In Handbook of International Economics (Vol. 5, pp. 1-134). Elsevier.
Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. Journal of Political Economy, 103(3), 624-660.
Obstfeld, M., & Rogoff, K. (1996). Foundations of international macroeconomics. MIT Press.
Rodrik, D. (2008). The real exchange rate and economic growth. Brookings Papers on Economic Activity, 2008(2), 365-416.
Rogoff, K. (1996). The Purchasing Power Parity Puzzle. Journal of Economic Literature, 34(2), 647-668.
Samuelson, P. A. (1964). Theoretical notes on trade problems. The Review of Economics and Statistics, 46(2), 145-154
Symansky, S. (1997). Economic growth and real exchange rate: An overview of the Balassa-Samuelson hypothesis in Asia (No. w5979). National Bureau of Economic Research.
Taylor, J. B. (2001). The role of the exchange rate in monetary-policy rules. American Economic Review, 91(2), 263-267.
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester conference series on public policy, 39, 195-214.
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), 15-29.
Tsay, R. S. (2005). Analysis of financial time series. John Wiley & Sons.
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester conference series on public policy.
Woodford, M. (2012). Methods of Policy Accommodation at the Interest-Rate Lower Bound. Federal Reserve Bank of Kansas City Economic Symposium.
Wong, H. T. (2012). Real exchange rate misalignment and economic growth in Malaysia. Malaysian Journal of Economic Studies, 49(2), 161-177.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Social Science and Human Research Bulletin
This work is licensed under a Creative Commons Attribution 4.0 International License.
