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Do Real Exchange Rate Appreciations Matter for Growth?

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  • Matthieu Bussière
  • Claude Lopez
  • Cédric Tille

Abstract

While the impact of exchange rate changes on economic growth has long been an issue of key importance in international macroeconomics, it has received renewed attention in recent years, owing to weaker growth rates and the debate on "currency wars". However, in spite of its prevalence in the policy debate, the connection between real exchange rates and growth remains an unsettled question in the academic literature. We fill this gap by providing an empirical assessment based on a broad sample of emerging and advanced economies. We assess the impact of appreciations, productivity booms and capital inflows surges using a propensity-score matching approach to address causality issues. We show that appreciations associated with higher productivity have a larger impact on growth than appreciations associated with capital inflows. Furthermore, the appreciation per se tends to have a negative impact on growth. We provide a simple theoretical model that delivers the contrasted growth-appreciation pattern depending on the underlying shock. The model also implies adverse effects of shocks to international capital flows, so concerns about an appreciation are not inconsistent with concerns about a depreciation. The presence of an externality through firms’ destruction leads to inefficient allocations. Nonetheless, addressing them does not require a dampening of exchange rate movements

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1922.

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Length: 40 pages
Date of creation: May 2014
Date of revision:
Handle: RePEc:kie:kieliw:1922

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Keywords: exchange rate; currency crises; endaka; international trade; international capital flows; lending booms; small open economy macroeconomics;

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Cited by:
  1. Dennis P. J. Botman & Irineu E. Carvalho Filho & Raphael W. Lam, 2013. "The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis," IMF Working Papers 13/228, International Monetary Fund.
  2. Erick Lahura & Marco Vega, 2013. "Asymmetric effects of FOREX intervention using intraday data: evidence from Peru," BIS Working Papers 430, Bank for International Settlements.
  3. Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp438, IIIS.
  4. Coricelli, Fabrizio & Ravasan, Farshad R & Wörgötter, Andreas, 2013. "The origins of the German current account surplus: Unbalanced productivity growth and structural change," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9527, C.E.P.R. Discussion Papers.

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