Original Research

Real exchange rate behaviour and economic growth: evidence from Sierra Leone

Abu Tarawalie
South African Journal of Economic and Management Sciences | Vol 13, No 1 | a195 | DOI: https://doi.org/10.4102/sajems.v13i1.195 | © 2011 Abu Tarawalie | This work is licensed under CC Attribution 4.0
Submitted: 26 April 2011 | Published: 04 May 2011

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Abstract

The main focus of this paper is to examine the impact of the real effective exchange rate on economic growth in Sierra Leone. First an analytical framework is developed to identify the determinants of the real effective exchange rate. Using quarterly data and employing recent econometric techniques, the relationship between the real effective exchange rate and economic growth is then investigated. A bivariate Granger causality test was also employed as part of the methodology to examine the causal relationship between the real exchange rate and economic growth. The empirical results suggest that the real effective exchange rate correlates positively with economic growth, with a statistically significant coefficient. The results also indicate that monetary policy is relatively more effective than fiscal policy in the long run, and evidence of the real effective exchange rate causing economic growth was profound. In addition, the results showed that terms of trade, exchange rate devaluation, investment to GDP ratio and an excessive supply of domestic credit were the main determinants of the real exchange rate in Sierra Leone.

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