1.0 INTRODUCTION
This
study attempts to empirically examine the rule of financial sector toward
economic growth and to determine the determinant of economic growth in some
countries. Cross sectional data were utilized in the study which is using year
2013. The OLS test results prove that the total reserve are significant while
the exchange rate are not significant. Total reserve can be defined as total
reserves comprise holdings of monetary gold, special drawing rights, reserves
of IMF members held by the IMF, and holdings of foreign exchange under the
control of monetary authorities[1].
Fapetu, & Oladapo (2014) exchange rate, is the rate
at which a currency purchases another which is as pointed out by Jhingan
(2003), it is a reflection of the strength of a currency when measured against
another country’s currency. It is the price of one currency in terms of
another, which is an important decision making variable in every nation, thus
making it a crucial issue for any country desirous of economic growth refer to Ahmed
and Zarma (1997). According to (Akpan & Atan, 2012) exchange rate policies in
developing countries are often sensitive and controversial, mainly because of
the kind of structural transformation required, such as reducing imports or
expanding non-oil exports, which invariably imply a depreciation of the nominal
exchange rate.
Research Objectives
Research
objective is to answer and examine:
i.
The rule of financial sector toward economic growth.
ii.
The relationship between economic growth and total reserve.
iii.
The relationship between economic growth and exchange rate.
iv.
The determinants of economic growth in some countries.
2.0 LITERATURE REVIEWS
According
to Akpan & Atan (2012) the earliest
and leading theoretical foundation for the choice of exchange rate regimes
rests on the optimal currency area (OCA) theory, developed by Mundell (1961)
and McKinnon (1963). Based on the theory, a fixed exchange rate regime can increase
trade and output growth by reducing exchange rate uncertainty and thus the cost
of hedging, and also encourage investment by lowering currency premium from
interest rates. However, on the other hand it can also reduce trade and output
growth by stopping, delaying or slowing the necessary relative price adjustment
process. According to the theory, a fixed regime can increase trade and output
growth by providing a nominal anchor and the often needed credibility for
monetary policy by avoiding competitive depreciation, and enhancing the
development of financial markets as pointed out by Barro & Gordon (1983),
Calvo & Vegh (2004), Edwards & Savastano (2000), Eichengreen et al
(1999), and Frankel (2003). Based on the Fapetu & Oladapo (2014) research, the
finding proved that the exchange rate does not significantly determine the
economic growth, but its show a positive relationship. However, the variables,
which an effective foreign exchange rate management is deemed to affect export,
foreign direct investment is found to affect economic growth. According to Fapetu & Oladapo (2014), Harris (2002) in
his research using the Generalised Least Square technique found that real
exchange rate, when well managed affect productivity growth in both the short
and long run, the result is
consistent with the competitiveness hypothesis, which suggests that exchange
rate depreciates boost productivity growth in the short run. While Dubas and
Lee (2005), found a robust relationship between exchange rate stability and
growth rates. Unugbro (2007) in Nigeria case observed that exchange rate
appreciation stimulates foreign direct investment while Salami (2006) found
that exchange rate is the most important variable that affects private foreign investment
in Nigeria of all the other macroeconomic variables.
3.0 METODOLOGY
3.1 Sources of Data and description
There
are totally three variables are being used in this study, which are Gross
Domestic Product (GDP), total reserve and exchange rate. We utilized
67 observations countries in selected cross sectional data in year 2013. The
data are collected from the world statistics[2].
The major variables for which data collected are
defined below:
Total reserves: Total reserves comprise
holdings of monetary gold, special drawing rights, reserves of IMF members held
by the IMF, and holdings of foreign exchange under the control of monetary
authorities. The gold component of these reserves is valued at year-end
(December 31) London prices.[3]
While, Foreign reserves (R) is the
total assets of central bank held in different reserves currencies abroad. The
reserves currencies includes; US dollar, Pound Sterling, Euro, Japanese Yen
etc. The common scale variables used in the model are GDP and imports (Irefin & Yaaba, 2011).
Exchange
Rate: According to Fapetu, & Oladapo (2014) exchange rate, is the rate
at which a currency purchases another which is as pointed out by Jhingan
(2003), it is a reflection of the strength of a currency when measured against
another country’s currency.
Economic
growth: The aggregate welfare definition of economic growth derives directly
from something approximating this concept of “Universal Utility”. Aggregate
welfare is defined as a quantitative concept; as a phenomenon which “...can be
brought under the category of greater or less”. The quantity which changes in
the process of growth is precisely this quantity of aggregate economic welfare.
Therefore the measurement of economic growth involves the measurement of
changes in aggregate economic welfare. This is taken to mean a quantification
of the neo-classical concept of real income. The flow of goods and services-the
concrete results of economic activity-are significant only as the physical
counterparts of psychic want-satisfactions.[4]
3.2 Econometric Model
Ln GDP = βO + β1X1
+ β2X2 + µ
GDP-
Economic growth/ Gross domestic product
X1-
Total reserve (TR)
X2-
Exchange rate (ER)
3.3
Theoretical Framework
Hypothesis
1
H0: TR not influence GDP
H1: TR influence GDP
Hypothesis
2
H0: ER not influence GDP
H1: ER influence GDP
3.4 Method of Analysis
The
analysis data is to answer the research question and research hypothesis and to
test the hypothesis. The data will be analyse using Eviews, which is using
Ordinary Least Square (OLS) to study the relationship of the independent
variables and dependent variable. The hypothesis test is to estimate the value
of Test Statistic whether to reject or accept the null hypothesis.
4.0 RESULT AND FINDING
ORDINARY LEAST SQUARE (OLS)
Dependent
Variable: LNGDP
|
||||
Method:
Least Squares
|
||||
Date:
08/03/15 Time: 20:48
|
||||
Sample:
1 67
|
||||
Included
observations: 67
|
||||
Variable
|
Coefficient
|
Std.
Error
|
t-Statistic
|
Prob.
|
C
|
12.50307
|
0.193978
|
64.45622
|
0.0000
|
TR
|
1.20E-06
|
2.07E-07
|
5.786494
|
0.0000
|
EX
|
-1.61E-05
|
0.000140
|
-0.115100
|
0.9087
|
R-squared
|
0.343555
|
Mean dependent var
|
12.88318
|
|
Adjusted
R-squared
|
0.323041
|
S.D. dependent var
|
1.762804
|
|
S.E. of
regression
|
1.450392
|
Akaike info criterion
|
3.625287
|
|
Sum
squared resid
|
134.6327
|
Schwarz criterion
|
3.724005
|
|
Log
likelihood
|
-118.4471
|
Hannan-Quinn criter.
|
3.664350
|
|
F-statistic
|
16.74738
|
Durbin-Watson stat
|
2.028781
|
|
Prob(F-statistic)
|
0.000001
|
|||
Based on the
Table 1.1 above we can reject the null hypothesis with 1 percent level of
significant where the prob (t-statistic) is 0.0000 is less than 0.01 and the
prob (t-statistic = 5.786494) is more than critical value 2 which is represent highly significant relationship
between TR and GDP. Thus, we can accept the alternate hypothesis. Based on
table 1.1 the prob (t-statistic = 0.115100) is less than critical value 2 and
the prob= 0.9087 is not significant which is representing the relationship
between ER and GDP. Thus, we cannot reject null hypothesis and have to reject
the alternate hypothesis. R-squared is 0.343555 meaning the 34.3555 percent of
economic growth is explained by total reserve and exchange rate and the balance
65.6445 percent is explain by other factors, thus, they are not included in the
model. Durbin Watson is 2.028781. Durbin Watson 2.028781 is more than critical value which is dL=1.377 and
du=1.500. Then we can conclude that the data doesn’t have autocorrelation. The
data also doesn’t have autocorrelation because the data that are being used is
the cross sectional data which is doesn’t influence by time.
5.0
CONCLUSION
From the
research we found that the total reserve are significant while the exchange
rate are not significantly in explaining the economic growth in 67 countries. Total
reserve is highly significantly explaining the economic growth in 67 countries
then we can suggest that as the resere increase the economic growth will
increase. Since the total reserve influence by the net export as the net export
is one of component in total income these suggest the result supported by the
theory. The net export is the one variable of the total reserve. The exchange
rate probably become not significant and have negative coefficient due to some
countries apply fixed exchange rate while others countries apply flexible
exchange rate. The result are similarly
with the Harris (2002) and Fapetu & Oladapo (2014) research. Which
is Harris (2002) found that exchange rate depreciates boost productivity growth
in the short run and Fapetu & Oladapo (2014) in the their
finding find that the exchange rate does not significantly determine the
economic growth, but its show a positive relationship. However, the variables,
which an effective foreign exchange rate management is deemed to affect export,
foreign direct investment is found to affect economic growth.\
REFERENCES
Ahmed, H.I and Zarma, A. (1997), “The
Impact of Parallel Market on the Stability of Exchange Rate: Evidence from Nigeria”, NDIC Quaterly Publication, Vol 7, No.
2 pp 42 – 61.
Akpan, E. O., & Atan, J. A. (2012). Effects of
Exchange Rate Movements On Economic Growth in Nigeria. CBN Journal of
Applied Statistics, 2(2), 1–14.
Barro, R.J. and
Gordon, D.B. (1983). ―Rules, Discretion, and Reputation in a Model of Monetary policy, Journal of Monetary
Economics 12, 101-20
Calvo,
Guillermo, (2003). Explaining Sudden Stop, Growth Collapse and BOP Crisis: The
Case of Discretionary Output Tax, The Mundell
Fleming Lecture for the Third Annual IMF Research
Conference, Washington, DC.
Dubas, J.M.,
Lee, B.J., and Mark, N.C. (2005), “Effective Exchange Rate Classifications and Growth”. NBER Working Paper No. 11272
Edwards,
Sebastian and Miguel A. Savastano, (2000). Exchange Rates in Emerging
Economies: What Do We Know? What Do We
Need to Know? In Economic Policy Reform: The Second Stage, ed. by Anne O. Krueger, pp. 453-510. Chicago: University of Chicago Press.
Eichengreen,
Barry, Paul Masson, Miguel Savastano, and Sunil Sharma, (1999). Transition Strategies and Nominal Anchors on the
Road to Greater Exchange Rate Flexibility, Essays in International Finance, No. 213 Princeton: Princeton University
Press.
Fapetu, Oladapo, J. A. O. (2014). FOREIGN EXCHANGE MANAGEMENT AND THE
NIGERIAN ECONOMIC GROWTH (1960 – 2012). European Journal of Business and
Innovation Research, 2(2), 19–31.
Frankel,
Jeffrey, (2003). Experience of and Lessons from Exchange Rate Regimes in
Emerging Economies, in Monetary and
Financial Cooperation in East Asia, Asian Development Bank, Macmillan, 2003.
Harris R.G. (2002), “New
Economy and the Exchange Rate Regime”, Center for International Economics Studies, Discussion paper, No 111.
Jhingan, M.L (2003), Money,
Banking, International Trade and Public Finance. New A.S. Offset Press, Delhi Irefin, D., &
Yaaba, B. N. (2011). Determinants of Foreign Reserves in Nigeria : An Autoregressive Distributed Lag Approach. Journal
of Applied Statistics, 2(2),
63–82.
McKinnon, Ronald and G. Schnabel, (2003). ―The
East Asian Dollar Standard, Fear of Floating, and
Original Sin‖, in: G. Ortiz, ed. Macroeconomic Stability, Financial Markets,
and Economic Development, Bank of
Mexico.- 33
Unugbro, A.O
(2007), “The Impact of Exchange Rate Fluctuation on Capital Inflow: The Nigerian
Experience”. The Nigeria
Academic Forum, Vol. 13, No.2
APPENDIX
No.
|
Observation
|
Official exchange rate, LCU per
USD, period average.xlsx
|
Total Reserves.xlsx
|
GDP at market prices, current
US$, millions, seas. adj..xlsx
|
1
|
Argentina
|
4.549547
|
39920.3
|
475196.4
|
2
|
Developing Asia
|
831.9153
|
4179035
|
11770056
|
3
|
Australia
|
0.965787
|
44866.05
|
1554792
|
4
|
Austria
|
0.778129
|
12232.1
|
394685.8
|
5
|
Belgium
|
0.778129
|
18600.11
|
483265.6
|
6
|
Bulgaria
|
1.521871
|
18371.02
|
50918.33
|
7
|
Bolivia
|
6.91
|
11659.29
|
27018.8
|
8
|
Brazil
|
1.954034
|
369566
|
2253022
|
9
|
Canada
|
0.999576
|
68364.97
|
1820902
|
10
|
Switzerland
|
0.937754
|
475659.2
|
631278
|
11
|
Chile
|
486.3323
|
41636.11
|
268375
|
12
|
China
|
6.309287
|
3333386
|
8190647
|
13
|
Colombia
|
1797.299
|
36444.02
|
370418.7
|
14
|
Costa Rica
|
502.9185
|
6856.67
|
45141.2
|
15
|
Czech Republic
|
19.56353
|
44265.28
|
196673.2
|
16
|
Germany
|
0.778129
|
67422.25
|
3430201
|
17
|
Denmark
|
5.792204
|
86137.54
|
315261.2
|
18
|
East Asia & Pacific
|
1074.159
|
3874222
|
9992303
|
19
|
Europe & Central Asia
|
589.7774
|
314459
|
1152065
|
20
|
Egypt, Arab Rep.
|
6.07065
|
11627.54
|
273543.2
|
21
|
Spain
|
0.778129
|
35522.62
|
1322962
|
22
|
Estonia
|
12.17508
|
287.3478
|
22396.5
|
23
|
Finland
|
0.778129
|
8453.225
|
247424.8
|
24
|
France
|
0.778129
|
54230.62
|
2612188
|
25
|
United Kingdom
|
0.631018
|
88596
|
2479815
|
26
|
Georgia
|
1.650514
|
2872.949
|
15843.14
|
27
|
Greece
|
0.778129
|
1269.616
|
249281.2
|
28
|
Hong Kong SAR, China
|
7.757025
|
317250.8
|
262963.6
|
29
|
Croatia
|
5.848283
|
14807.13
|
56457.55
|
30
|
Hungary
|
225.0717
|
44506.05
|
124655.5
|
31
|
High income: OECD
|
43.77112
|
3072346
|
44415484
|
32
|
Indonesia
|
9362.746
|
108837.3
|
880306.4
|
33
|
India
|
53.42984
|
270586.5
|
1718433
|
34
|
Ireland
|
0.778129
|
1386.38
|
210740.6
|
35
|
Italy
|
0.778129
|
50498.86
|
2014749
|
36
|
Jordan
|
0.708492
|
8089.514
|
27198.69
|
37
|
Japan
|
79.81889
|
1227147
|
5937979
|
38
|
Korea, Rep.
|
1126.426
|
323207.1
|
1130185
|
39
|
Sri Lanka
|
127.6523
|
6377.645
|
59319.15
|
40
|
Lithuania
|
2.686292
|
8218.173
|
42178.03
|
41
|
Luxembourg
|
0.778129
|
870.9995
|
55143.61
|
42
|
Latvia
|
0.542592
|
7110.871
|
28556.68
|
43
|
Macao SAR, China
|
7.989736
|
16600.23
|
43516.63
|
44
|
Mexico
|
13.15545
|
160413.4
|
1179044
|
45
|
Malaysia
|
3.088025
|
137783.9
|
304853.8
|
46
|
Netherlands
|
1.71477
|
22050.3
|
771050.1
|
47
|
Norway
|
5.818355
|
51856.4
|
499797.2
|
48
|
New Zealand
|
1.234821
|
17582.96
|
169490.4
|
49
|
Peru
|
2.637371
|
62300.32
|
199584.9
|
50
|
Philippines
|
42.22274
|
73478.39
|
250191.2
|
51
|
Poland
|
3.25522
|
103396.2
|
489794.8
|
52
|
Portugal
|
0.778129
|
2196.025
|
212275
|
53
|
Paraguay
|
4425.05
|
4556.609
|
24542.62
|
54
|
Russian Federation
|
31.06153
|
486576.8
|
2012199
|
55
|
South Asia
|
60.26146
|
304816.4
|
1777753
|
56
|
Singapore
|
1.249456
|
259094.5
|
276659.3
|
57
|
Sub-Saharan Africa
|
263.0689
|
195732.3
|
382756.9
|
58
|
Slovakia
|
23.44189
|
818.4068
|
91148.74
|
59
|
Slovenia
|
186.4709
|
782.1872
|
45461.03
|
60
|
Sweden
|
6.772264
|
45519.23
|
524299.9
|
61
|
Thailand
|
31.07915
|
173327.7
|
366304.7
|
62
|
Tunisia
|
1.562155
|
8357.241
|
45123.11
|
63
|
Turkey
|
1.80033
|
99942.63
|
786483.5
|
64
|
Taiwan, China
|
29.58199
|
403169
|
475951.9
|
65
|
Ukraine
|
8.083841
|
22655.84
|
174164.9
|
66
|
United States
|
1
|
139133.9
|
16244575
|
67
|
South Africa
|
8.208319
|
43995.47
|
382756.9
|
