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Date: 10/28/2016
Author(s): Elton Bollers and Tarron Khemraj
Using time-series econometric techniques, this paper examines the relationship between foreign exchange shocks and economic growth. These shocks result from a trend stationary process of the level of foreign exchange given the economic structure of the economies under study. The empirical model is motivated by a theoretical framework showing the connection between the localized foreign exchange market and economic growth. The estimation is conducted for ten small very open economies: The Bahamas, Barbados, Guyana, Jamaica, St. Lucia, Belize, Mauritius, Grenada, Fiji and Trinidad and Tobago. The results indicate a noticeable effect of foreign exchange shocks on economic growth. The estimates reveal that the growth of physical capital is also important in determining economic growth, while the results for population growth are more mixed.