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Desperately Seeking the Positive Impact of Undervaluation on Growth

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  • Ridha Nouira
  • Khalid Sekkat

    (University of Brussels, Belgium and ERF)

Abstract

This paper contributes to a current and intense debate among economists on whether real exchange rate undervaluation can boost growth. It focuses on addressing econometric and empirical issues that casts doubt about the validity of such positive impact. It also allows for the possibilities that the effect of undervaluation on growth operates with delay or dependence on the persistence or the level of undervaluation. We didn’t find any convincing support to the claim that a depreciated equilibrium real exchange rate promotes economic growth. We argue that the contrast between our results and the documented examples of a successful adoption of undervaluation strategy reported in the literature reveals that undervaluation alone is not enough to boost growth. The simultaneous adoption of companion policies may be behind the claimed success.

Suggested Citation

  • Ridha Nouira & Khalid Sekkat, 2010. "Desperately Seeking the Positive Impact of Undervaluation on Growth," Working Papers 560, Economic Research Forum, revised 10 Jan 2010.
    • Handle: RePEc:erg:wpaper:560
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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