The impact of exchange rates volatility on economic growth in developing countries

This thesis examines the relationship between exchange rate volatility and economic growth in developing countries during 2010-2024. Exchange rate fluctuations present a dual impact: while currency depreciation can enhance export competitiveness and attract foreign direct investment, excessive volatility creates uncertainty that hampers investment decisions and increases import costs, potentially constraining economic growth. Using panel data from 87 developing countries classified by World Bank income thresholds, the study employs Feasible Generalized Least Squares (FGLS) regression methodology to analyze the direct impact of exchange rate volatility on economic growth. The sample is divided into lower-middle-income ($1,086-$4,255) and upper-middle-income ($4,256-$13,205) country groups to enable comparative analysis across development stages. Previous empirical studies have yielded inconsistent findings, with some researchers identifying negative growth effects while others highlight volatility's role as an economic shock absorber. This research addresses two primary objectives: examining the direct impact of exchange rate volatility on economic growth across different income groups, and proposing evidence-based policy recommendations for exchange rate management in developing countries. The findings contribute to academic literature while providing practical guidance for policymakers navigating currency volatility challenges in emerging economies.