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Short- and long-term growth effects of exchange rate adjustment

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  • Evžen Kočenda

    ()
    (CERGE-EI - Center for Economic Research and Graduate Education - Economics Institute)

  • Mathilde Maurel

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Gunther Schnabl

    ()
    (University of Leipzig - Institute for Economic Policy)

Abstract

The European sovereign debt crisis revived the discussion concerning pros and cons of exchange rate adjustment in the face of asymmetric shocks. In the spirit of keynes, exit from the euro area is to regain rapidly international competitiveness. In the spirit of Schumpeter, exhange rate stability with structural reforms would be beneficial towards the long-run growth performance. Previous literature has estimated the average growth of countries with different degrees of exchange rate flexibility. We augment this literature by analyzing short-and long-term growth effects of exchange rate flexibility in a panel-cointegration framework for a sample of 60 countries clustered in five country groups. The estimations show that countries with a high degree of exchange rate stability exhibit a higher long-term growth performance. In line with Mundell (1961), we show that the degree of business cycle synchronization with the (potential) anchor country matters for the impact of exchange rate flexibility on growth.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00748599.

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Date of creation: Dec 2012
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Handle: RePEc:hal:cesptp:halshs-00748599

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Keywords: Exchange rate regime; crisis; shock adjustment; theory of optimum currency areas; Mundell; Schumpeter; Hayek; cointegration;

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 379-408, May.
  2. Gunther Schnabl, 2009. "Exchange Rate Volatility and Growth in Emerging Europe and East Asia," Open Economies Review, Springer, Springer, vol. 20(4), pages 565-587, September.
  3. Ansgar Belke & Ralph Setzer, 2003. "Exchange Rate Volatility and Employment Growth: Empirical Evidence from the CEE Economies," CESifo Working Paper Series 1056, CESifo Group Munich.
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  6. Mathilde Maurel & Gunther Schnabl, 2011. "Keynesian and Austrian Perspectives on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth," Global Financial Markets Working Paper Series 18-2011, Friedrich-Schiller-University Jena.
  7. Eichengreen, Barry, 2002. "Financial Crises and What to Do About Them," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199257447, October.
  8. Stanley Fischer, 1983. "Inflation and Growth," NBER Working Papers 1235, National Bureau of Economic Research, Inc.
  9. Kocenda, Evzen & Poghosyan, Tigran, 2009. "Macroeconomic sources of foreign exchange risk in new EU members," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(11), pages 2164-2173, November.
  10. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(1), pages 3-26, February.
  11. Lukas Vogel, 2011. "Structural reforms and external rebalancing in the euro area: a model-based analysis," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 443, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  12. Harrison, Ann & Rodríguez-Clare, Andrés, 2010. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," Handbook of Development Economics, Elsevier, Elsevier.
  13. Paul De Grauwe & Gunther Schnabl, 2008. "Exchange Rate Stability, Inflation, and Growth in (South) Eastern and Central Europe," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 12(3), pages 530-549, 08.
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