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Real Exchange Rates, Valuation Effects and Growth in Emerging Markets

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  • Michael Bleaney,
  • Liliana Castilleja Vargas
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    Abstract

    We compare the relationship between net capital inflows, real exchange rate movements and growth for twenty emerging markets and thirteen developed countries over the period 1985-2004. In developed countries low real exchange rates are associated with faster growth, but in emerging markets depreciations depress growth, even outside crisis periods, and are closely correlated with declines or reversals in net capital inflows. To investigate valuation effects of currency movements, we construct debt-weighted real exchange rate indices for emerging markets. We find only limited evidence that the contractionary effects of real depreciations in emerging markets can be attributed to valuation effects.

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    File URL: http://www.nottingham.ac.uk/credit/documents/papers/07-12.pdf
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    Bibliographic Info

    Paper provided by University of Nottingham, CREDIT in its series Discussion Papers with number 07/12.

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    Handle: RePEc:not:notcre:07/12

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    Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
    Phone: (44) 0115 951 5620
    Fax: (0115) 951 4159
    Web page: http://www.nottingham.ac.uk/economics/
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    Keywords: Capital flows; real exchange rates; growth; emerging markets;

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    1. Sebastian Edwards, 1985. "Are Devaluations Contractionary?," NBER Working Papers 1676, National Bureau of Economic Research, Inc.
    2. Lane, Philip R. & Shambaugh, Jay C, 2007. "Financial Exchange Rates and International Currency Exposures," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6473, C.E.P.R. Discussion Papers.
    3. Hutchison, Michael M. & Noy, Ilan, 2004. "Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow Reversals and Output Loss in Emerging Markets," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt38j2b036, Center for International Economics, UC Santa Cruz.
    4. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    5. Michael B. Devereux & Philip Lane, 2001. "Exchange Rates and Monetary Policy in Emerging Market Economies," CEG Working Papers, Trinity College Dublin, Department of Economics 20017, Trinity College Dublin, Department of Economics.
    6. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115, pages 69-102.
    7. Pablo Andres Neumeyer & Fabrizio Perri, 1999. "Business Cycles in Emerging Economies: the role of interest rates," Department of Economics Working Papers, Universidad Torcuato Di Tella 014, Universidad Torcuato Di Tella.
    8. Cook, David, 2004. "Monetary policy in emerging markets: Can liability dollarization explain contractionary devaluations?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(6), pages 1155-1181, September.
    9. Fernando Broner & Gaston Gelos & Carmen Reinhart, 2004. "When in peril, retrench: testing the portfolio channel of contagion," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
    10. Gopinath, Gita, 2004. "Lending booms, sharp reversals and real exchange rate dynamics," Journal of International Economics, Elsevier, Elsevier, vol. 62(1), pages 1-23, January.
    11. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
    12. Guillermo Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," NBER Working Papers 9808, National Bureau of Economic Research, Inc.
    13. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. V�gh, 2003. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 17(4), pages 51-74, Fall.
    14. Gupta, Poonam & Mishra, Deepak & Sahay, Ratna, 2007. "Behavior of output during currency crises," Journal of International Economics, Elsevier, Elsevier, vol. 72(2), pages 428-450, July.
    15. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 25(7), pages 903-923, 07.
    16. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, Elsevier, vol. 65(1), pages 9-15, October.
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