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Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?

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  • Samba Mbaye

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

Abstract

Undervaluation 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.

Suggested Citation

  • Samba Mbaye, 2012. "Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?," Working Papers halshs-00687948, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00687948
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00687948v2
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    References listed on IDEAS

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    Cited by:

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    3. Abdul Jalil, 2021. "Exchange Rate Policy Must Seek Undervaluation!," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 60(1), pages 85-91.
    4. Hernán Herrera-Echeverri & Jerry Haar & Alexander Arrieta Jiménez & Manuel Araújo Zapata, 2015. "Devaluation, Competitiveness And New Business Formation In Emerging Countries," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-22, September.
    5. Mohammad A. Razzaque & Sayema Haque Bidisha & Bazlul Haque Khondker, 2017. "Exchange Rate and Economic Growth," Journal of South Asian Development, , vol. 12(1), pages 42-64, April.
    6. Diallo, Ibrahima Amadou, 2015. "On the link between real exchange rate misalignment and growth: theory and empirical evidence," MPRA Paper 68064, University Library of Munich, Germany.
    7. DEGUENONVO, Cédric, 2017. "Real exchange rate misalignment in Senegal: effect on growth," MPRA Paper 84338, University Library of Munich, Germany.

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    Keywords

    real exchange rate; misalignment; undervaluation; growth; productivity;
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