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Going under to stay on top: How much real exchange rate undervaluation is needed to boost growth in developing countries

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  • Cecilia Bermúdez
  • Carlos Dabús

Abstract

This paper explores the real exchange rate (RER)-economic growth relationship for a wide sample of countries over the period 1960-2009. After removing influen-tial observations, the system-GMM estimates suggest a positive link between an undervalued RER and growth in non-industrial countries, particularly in those with upper-middle and high income levels. In turn, RER volatility is found har-mful for growth. These results holds when testing for asymmetric effects of RER misalignment: a real undervaluation boosts growth in non-industrial countries, while overvaluation seems to have no effects at any income level. Besides, the magnitude of the misalignment is also relevant: an undervalued RER of about 26% on average has a positive impact on growth.

Suggested Citation

  • Cecilia Bermúdez & Carlos Dabús, 2018. "Going under to stay on top: How much real exchange rate undervaluation is needed to boost growth in developing countries," Estudios de Economia, University of Chile, Department of Economics, vol. 45(1 Year 20), pages 5-28, June.
    • Handle: RePEc:udc:esteco:v:45:y:2018:i:1:p:5-28
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    More about this item

    Keywords

    Economic growth; real exchange rate; exchange rate volatility; non-industrial countries;
    All these keywords.

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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