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Implications of real exchange rate misalignment in developing countries: theory, empirical evidence and application to growth performance in Zimbabwe

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  • Ndlela, Thandinkosi
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    Abstract

    The influence of exchange rate signals in an economy is very powerful and often pervasive. Moreover, sustained real exchange rate overvaluation, will, by distorting resource allocation away from productive activities, eventually lead to drastic adjustments of relative prices and reduction of aggregate economic growth. However, the direct theoretical and empirical link between exchange rate misalignment and macroeconomic indicators still remains to be fully understood. Nonetheless, empirical studies continue to make attempts to understand this relationship by exploring relationships that incorporate different measures of exchange rate misalignment in traditional growth regression models. Thus, based on a behavioural equilibrium exchange rate derived measure exchange rate misalignment, this paper presents an empirical analysis of the relationship between real gross domestic product growth and real exchange rate misalignment for Zimbabwe. After controlling for other structural and policy variables, the main findings demonstrate that exchange rate misalignment exerts a negative and highly statistically significant impact on growth. Overall, the results lend support to the hypothesis that chronic real exchange rate overvaluation was a key fundamental behind the post-2000 economic growth contraction in Zimbabwe.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32710.

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    Date of creation: 11 Aug 2010
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    Handle: RePEc:pra:mprapa:32710

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    Keywords: Zimbabwe; Real exchange rate misalignment; exchange rate overvaluation; economic growth; growth performance;

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