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Exchange Rate Misalignment and Growth: Old and New Econometric Evidence

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  • Paulo Gala

    (Universidade de São Paulo)

  • Claudio R. Lucinda

    (Universidade de São Paulo)

Abstract

Several studies have tried to identify the relationship between growth and misaligned or overvalued currencies. Many works (Easterly (2001) and Fajnzylber et alii (2002)), find negative correlations between exchange rate misalignment and growth for a long list of developing countries since the seventies; the more overvalued the currency, the smaller the per capita growth rates. Even after controlling the regressions for several types of variables, the studies cannot reject the statistical significance of overvalued exchange rates in explaining growth. This paper presents new econometric evidence for the exchange rate levels and growth relation based on a panel data study for 58 developing countries from 1960 until 1999 using PPP deviation measures. Our main contribution here is to estimate growth regressions with a real exchange rate index that deals with changes in real GDP per capita levels. We use a new overvaluation index that takes into account variations in real per capita incomes, adjusting, thus, our exchange rate estimates for the so-called Balassa-Samuelson effect. By correcting traditional real exchange rate annual estimates for GDP per capita increases, we intend to control our whole series for appreciations due to productivity increases as many authors do for some specific years.

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Bibliographic Info

Article provided by ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics] in its journal Economia.

Volume (Year): 7 (2006)
Issue (Month): 4 ()
Pages: 165–187

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Handle: RePEc:anp:econom:v:7:y:2006:i:4:p:165-187

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Keywords: Exchange Rate Levels; Overvaluations; Growth;

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References

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Citations

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Cited by:
  1. Mbaye, Samba, 2012. "Currency Undervaluation and Growth: Is there a Productivity Channel?," MPRA Paper 44261, University Library of Munich, Germany.
  2. Brixiova, Zuzana & Ncube, Mthuli, 2014. "The Real Exchange Rate and Growth in Zimbabwe: Does the Currency Regime Matter?," IZA Discussion Papers 8398, Institute for the Study of Labor (IZA).
  3. Robert Pollin & James Heintz, 2007. "Expanding Decent Employment in Kenya: The Role of Monetary Policy, Inflation Control, and the Exchange Rate," Country Study 6, International Policy Centre for Inclusive Growth.
  4. Aliyu, Shehu Usman Rano, 2008. "Exchange Rate Volatility and Export Trade in Nigeria: An Empirical Investigation," MPRA Paper 13490, University Library of Munich, Germany, revised 17 Feb 2009.
  5. Samba Mbaye, 2012. "Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?," Working Papers halshs-00687948, HAL.
  6. Aderbal Oliveira Damasceno & Flávio Vilela Vieir, 2014. "Desalinhamento Cambial, Volatilidade Cambial E Crescimento Econômico: Uma Análise Para A Economia Brasileira (1995-2011)," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 100, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  7. Marcel Schröder, 2013. "Should developing countries undervalue their currencies?," Departmental Working Papers 2013-12, The Australian National University, Arndt-Corden Department of Economics.
  8. Audrey Sallenave, 2010. "Real Exchange Rate Misalignments and Economic Performance for the G20 Countries," Economie Internationale, CEPII research center, issue 121, pages 59-80.
  9. Camelia Minoiu & Patrick A. Imam, 2008. "Mauritius," IMF Working Papers 08/212, International Monetary Fund.
  10. Flávio, Vieira & MacDonald, Ronald, 2010. "A Panel Data Investigation of Real Exchange Rate Misalignment and Growth," SIRE Discussion Papers 2010-29, Scottish Institute for Research in Economics (SIRE).
  11. James Heintz & Robert Pollin, 2008. "Targeting Employment Expansion, Economic Growth and Development in Sub-Saharan Africa: Outlines of an Alternative Economic Programme for the Region," Published Studies targeting_employment_expa, Political Economy Research Institute, University of Massachusetts at Amherst.
  12. Carl Grekou, 2014. "Revisiting the nexus between currency misalignments and growth in the CFA Zone," EconomiX Working Papers 2014-4, University of Paris West - Nanterre la Défense, EconomiX.

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