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Real Exchange Rates, Trade, and Growth: Italy 1861-2011

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Author Info

  • Virginia Di Nino

    ()
    (Bank of Italy)

  • Barry Eichengreen

    ()
    (University of California, Berkeley)

  • Massimo Sbracia

    ()
    (Bank of Italy)

Abstract

What is the relationship between real exchange rate misalignments and economic growth? And what effect, if any, did undervaluations or overvaluations of the lira/euro have on Italy's growth? We address these questions by presenting, first, three main facts: (i) there is a positive relationship between undervaluation and growth; (ii) this relationship is strong for developing countries and weak for advanced countries; (iii) these results tend to hold for both the pre- and the post-World War II period. Building a simple analytical model, we explore channels through which undervaluation may exert a positive effect on real GDP. We assume that productivity is higher in the tradeable-goods than in the non-tradeable-goods sector, and examine the roles of market structure, scale economies and wage flexibility in channelling resources from the latter to the former sector, increasing exports and real GDP. We then turn to Italy and verify empirically that, as the theory suggests, undervaluation has positively affected its exports. Undervaluation has been helpful, in particular, to increase the exports of high-productivity sectors, such as most manufacturing industries. Finally, we describe the misalignments of the lira/euro since 1861, analyze their determinants and draw the implications for Italy's economic growth.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Quaderni di storia economica (Economic History Working Papers) with number 10.

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Date of creation: Oct 2011
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Handle: RePEc:bdi:workqs:qse_10

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Keywords: Currency misalignments; Competitiveness; Italy; Export; Growth;

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Citations

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Cited by:
  1. Emanuele Felice & Giovanni Vecchi, 2013. "Italy’s Growth and Decline, 1861-2011," CEIS Research Paper 293, Tor Vergata University, CEIS, revised 11 Oct 2013.
  2. Douglas L. Campbell, 2013. "Relative Prices, Hysteresis, and the Decline of American Manufacturing," 2013 Papers pca584, Job Market Papers.
  3. Auboin, Marc & Ruta, Michele, 2013. "The relationship between exchange rates and international trade: a literature review," World Trade Review, Cambridge University Press, vol. 12(03), pages 577-605, July.
  4. Nicholas Crafts & Marco Magnani, 2011. "The Golden Age and the Second Globalization in Italy," Quaderni di storia economica (Economic History Working Papers) 17, Bank of Italy, Economic Research and International Relations Area.
  5. Harrison, Mark, 2011. "Capitalism at War," CAGE Online Working Paper Series 60, Competitive Advantage in the Global Economy (CAGE).
  6. Mbaye, Samba, 2012. "Currency Undervaluation and Growth: Is there a Productivity Channel?," MPRA Paper 44261, University Library of Munich, Germany.
  7. Claire Giordano & Ferdinando Giugliano, 2012. "A Tale of Two Fascisms: Labour Productivity Growth and Competition Policy in Italy, 1911-1951," Quaderni di storia economica (Economic History Working Papers) 28, Bank of Italy, Economic Research and International Relations Area.
  8. Juan Marchetti & Michele Ruta & Robert Teh, 2012. "Trade Imbalances and Multilateral Trade Cooperation," CESifo Working Paper Series 4050, CESifo Group Munich.
  9. Martín Rapetti, 2013. "The Real Exchange Rate and Economic Growth: Some Observations on the Possible Channels," UMASS Amherst Economics Working Papers 2013-11, University of Massachusetts Amherst, Department of Economics.

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