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Real Exchange Rate, Effective Demand, and Economic Growth: Theory and Empirical Evidence for Developed and Developing Countries, 1960-2010

Author

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  • Francisco A. Martínez-Hernández

    (Department of Economics, State University of New York New Paltz)

Abstract

This paper seeks to assess the effects of an undervalued currency on economic growth. Based on a reformulation of Rodrik’s undervaluation index, our econometric results suggest that real exchange rate undervaluation has, to differing degrees, been able to enhance the economic growth of developed and developing countries. Nevertheless, when we disaggregate the main components of aggregate demand for different clusters of developed and developing countries using the Stock Flow Consistent approach (SFC), we find that in general, an undervalued currency has expansionary and contractionary effects in the short-run, specifically via the export sector and the level of aggregate consumption, respectively. This paper also estimates the effects of an undervalued currency on the level of investment and the trade balance.

Suggested Citation

  • Francisco A. Martínez-Hernández, 2016. "Real Exchange Rate, Effective Demand, and Economic Growth: Theory and Empirical Evidence for Developed and Developing Countries, 1960-2010," Working Papers 1609, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:1609
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    References listed on IDEAS

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    5. Simon Johnson & Jonathan D Ostry & Arvind Subramanian, 2010. "Prospects for Sustained Growth in Africa: Benchmarking the Constraints," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 119-171, April.
    6. Palma, J.G., 2010. "Why has productivity growth stagnated in most Latin-American countries since the neo-liberal reforms? (Revised 26-07-2011)," Cambridge Working Papers in Economics 1030, Faculty of Economics, University of Cambridge.
    7. Mr. Andrew Berg & Yanliang Miao, 2010. "The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back?," IMF Working Papers 2010/058, International Monetary Fund.
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    More about this item

    Keywords

    Undervalued Currency; Developed and Developing Countries; Effective Demand Components; Economic Growth; Panel Data Models;
    All these keywords.

    JEL classification:

    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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