Economic growth and exchange rate appreciation

In this paper we have tried to evaluate, (1) how the often heard argument that growth leads to an appreciating currency relates to existing theoretical models of exchange rate determination and (2) how empirical evidence supports this argument. Via the money demand equation the monetary exchange rate model includes this relationship. Other types of explanations considered in the paper postulate somewhat indirect links between exchange rate and growth and often are not very precise. Empirical data show that there has been a correlation between growth and exchange rate appriciation in the DEM/USD case especially since 1980, but for DEM/GBP and GBP/USD exchange rates such a relation cannot be found. Thus, neither the theoretical nor empirical aspects support a clear relationship between growth and exchange rate appreciation.