The effect of exchange rates on economic growth (A case study of Algeria)

This study evaluates the effect of Exchange Rates on Economic Growth (A Case Study of Algeria). The time series data were used during the period 1996 to 2014. I take the augmented dickey fuller test (ADF), philipps-perron test (PP), Johansen Test for Cointegration, and Vector Error Correction Model (VECM), with the support of other estimation techniques test of (Jarque – Bera) to test the normal distribution model, and the test of goodness of the model with auto correlation between second degree error (LM) and test of self-regression condition with (ARCH) error .was employed to show the effect of exchange rate on economic growth in Algeria. The explanatory or independent variables in this study are Real Exchange Rate (REXR), Broad money (BM), and Exports (EXP), while the Gross Domestic Product (GDP) was used as dependent variable. The results shows that there is a positive relationship between real exchange rate and economic growth at both the short-run and long-run. The results reveals that appreciation in the value of Algerian Dinar promotes economic growth at both the short-run and long-run. It also reveals that (BM) have negative relationship with (GDP) at both the short-run and long-run .and Export happens to be positively related to (GDP) at both the short-run and long-run .to reach the goal of the study which is to find out the relationship between the change in the exchange rate and economic growth in theory and practice . we came to several conclusions that the dinar exchange rate affects also it is influenced by both economic growth, broad money, the export across multiple channels such as interest rate, monetary policy. Based on the findings of this study, the researcher recommended that, since dinar appreciation increases economic growth at both the short-run and long-run, then the policy of dinar depreciation in order to increase exports and employment in the economy might not be the suitable policy for Algeria .the best idea is to allow the exchange rates to be determined by the forces of demand and supply. Algeria should also establish a very strict measures on import in order to protect and expand our local industries. This can be easily done by providing an export subside and also imposes the importing tariffs. This will increases patronization of products made in Algeria and also make Algerian dinar stronger, thus boosting a nation's economy. And finally the researcher recommended that the Central Bank of Algeria should guide the exchange rate in the economy considering its shock effect in all time. Key words: exchange rates, economic growth, financial policy.