Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?
AbstractUndervaluation of the currency is generally believed to affect growth through two main transmission channels: the "capital accumulation channel" and the "total factor productivity (TFP) growth channel". This paper carries out the first empirical investigation on the TFP growth channel. More specifically, we provide answers to the three following questions: Does undervaluation of the currency boost the overall productivity level in the economy? If so, does this "undervaluation-induced" productivity improvement significantly enhance growth? And finally, what is the magnitude of the TFP growth channel compared to the capital accumulation channel? The analysis is conducted on a panel of 72 countries over 1970-2008. The results give strong support to the TFP growth channel: a 10% increase in undervaluation enhances growth on average by 0.14% via an improvement in productivity. Most interestingly, our estimates suggest that this channel conveys the most important part of the growth-enhancing effect of undervaluation. The model has been subject to various robustness checks to support these findings.
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Date of creation: 16 Apr 2012
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real exchange rate; misalignment; undervaluation; growth; productivity;
Other versions of this item:
- Samba MBAYE, 2012. "Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?," Working Papers 201211, CERDI.
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-23 (All new papers)
- NEP-FDG-2012-04-23 (Financial Development & Growth)
- NEP-OPM-2012-04-23 (Open Economy Macroeconomic)
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