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The Real Exchange Rate and Growth Revisited

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Author Info

  • Andrew Berg
  • Yanliang Miao

Abstract

There is good reason and much evidence to suggest that the real exchange rate matters for economic growth, but why? The "Washington Consensus" (WC) view holds that real exchange rate misalignment implies macroeconomic imbalances that are themselves bad for growth. In contrast, Rodrik (2008) argues that undervaluation relative to purchasing power parity is good for growth because it promotes the otherwise inefficiently small tradable sector. Our main result is that WC and the Rodrik views of the role of misalignment in growth are observationally equivalent for the main growth regressions he reports. There is an identification problem: Determinants of misalignment are also likely to be independent drivers of growth, and these types of growth regressions are hard-pressed to disentangle the different channels. However, we confirm that not only are overvaluations bad but undervaluations are also good for growth, a result squarely consistent with the Rodrik story but one that requires some gymnastics from the WC viewpoint.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/58.

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Length: 24
Date of creation: 01 Mar 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/58

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Related research

Keywords: Economic growth; Economic models; Purchasing power parity; Real effective exchange rates; exchange rate; real exchange rate; equation; equilibrium exchange rate; exchange rates; exchange rate misalignment; equations; statistics; standard errors; exchange rate misalignments; standard deviation; real exchange rate misalignment; statistic; logarithm; real exchange rate misalignments; market exchange rate; correlation; outliers; undervalued exchange rates; exchange rate appreciation; cointegration; bootstrap; empirical framework; exchange rate appreciations; effective exchange rate; exchange rate determination; foreign exchange; effective exchange rates; real exchange rates; statistical significance; sampling; real exchange rate appreciations; exchange rate deviations; real effective exchange rate; exchange rate overvaluation; real exchange rate appreciation; exchange rate needs; exchange rate overvaluations; exchange rate policy; sampling error;

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References

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  1. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
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  13. Dani Rodrik, 2008. "The Real Exchange Rate and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 365-439.
  14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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