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Can Real Exchange Rate Undervaluation Boost Exports and Growth in Developing Countries? Yes, But Not for Long

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  • Mona Haddad
  • Cosimo Pancaro

Abstract

A policy of managed real undervaluation may have been an important factor behind the success of East Asia’s export-led growth model. But current discussions over the value of China’s currency demonstrate the controversy this kind of policy can generate. Although a managed real undervaluation can enhance domestic competitiveness, it is difficult to sustain—both economically and politically—in the post-crisis environment. We show that a real undervaluation works only for low-income countries, and only in the medium term.

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Bibliographic Info

Paper provided by The World Bank in its series World Bank Other Operational Studies with number 10178.

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Date of creation: Jun 2010
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Handle: RePEc:wbk:wboper:10178

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Keywords: Finance and Financial Sector Development - Debt Markets Macroeconomics and Economic Growth - Macroeconomic Management Macroeconomics and Economic Growth - Economic Stabilization Finance and Financial Sector Development - Currencies and Exchange Rates Poverty Reduction - Achieving Shared Growth;

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References

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  1. Philippe Aghion & Philippe Bacchetta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Working Papers, Swiss National Bank, Study Center Gerzensee 06.02, Swiss National Bank, Study Center Gerzensee.
  2. William Easterly, 2003. "National Policies and Economic Growth: A Reappraisal," Working Papers, Center for Global Development 27, Center for Global Development.
  3. Sauer, Christine & Bohara, Alok K, 2001. "Exchange Rate Volatility and Exports: Regional Differences between Developing and Industrialized Countries," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 9(1), pages 133-52, February.
  4. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does the Nominal Exchange Rate Regime Matter?," NBER Working Papers, National Bureau of Economic Research, Inc 5874, National Bureau of Economic Research, Inc.
  5. Alvaro Aguirre & César Calderón, 2005. "Real Exchange Rate Misalignments and Economic Performance," Working Papers Central Bank of Chile, Central Bank of Chile 316, Central Bank of Chile.
  6. Klein, Michael W., 1990. "Sectoral effects of exchange rate volatility on United States exports," Journal of International Money and Finance, Elsevier, Elsevier, vol. 9(3), pages 299-308, September.
  7. Luis Servén, 2003. "ERRATUM: Real-Exchange-Rate Uncertainty and Private Investment in LDCs," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 85(2), pages 492-492, May.
  8. Simon Johnson & Jonathan D. Ostry & Arvind Subramanian, 2007. "The Prospects for Sustained Growth in Africa: Benchmarking the Constraints," NBER Working Papers, National Bureau of Economic Research, Inc 13120, National Bureau of Economic Research, Inc.
  9. Arize, Augustine C & Osang, Thomas & Slottje, Daniel J, 2000. "Exchange-Rate Volatility and Foreign Trade: Evidence from Thirteen LDC's," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 18(1), pages 10-17, January.
  10. Arvind Subramanian & Jonathan David Ostry & Simon Johnson, 2007. "The Prospects for Sustained Growth in Africa," IMF Working Papers, International Monetary Fund 07/52, International Monetary Fund.
  11. Bleaney, Michael & Greenaway, David, 2001. "The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa," Journal of Development Economics, Elsevier, Elsevier, vol. 65(2), pages 491-500, August.
  12. Korinek, Anton & Serven, Luis, 2010. "Undervaluation through foreign reserve accumulation : static losses, dynamic gains," Policy Research Working Paper Series, The World Bank 5250, The World Bank.
  13. Bosworth, B. & Collins, S.M. & Chen, Y.C., 1995. "Accounting for Differences in Economic Growth," Papers, Brookings Institution - Working Papers 115, Brookings Institution - Working Papers.
  14. Mckenzie, Michael D., 1998. "The impact of exchange rate volatility on Australian trade flows," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 8(1), pages 21-38, January.
  15. Luis Servén, 2003. "Real-Exchange-Rate Uncertainty and Private Investment in LDCS," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 85(1), pages 212-218, February.
  16. Myint Moe Chit & Marian Rizov & Dirk Willenbockel, 2010. "Exchange Rate Volatility and Exports: New Empirical Evidence from the Emerging East Asian Economies," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 33(2), pages 239-263, 02.
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Citations

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Cited by:
  1. Auboin, Marc & Ruta, Michele, 2013. "The relationship between exchange rates and international trade: a literature review," World Trade Review, Cambridge University Press, Cambridge University Press, vol. 12(03), pages 577-605, July.
  2. Tomanova, Lucie, 2013. "Exchange Rate Volatility and the Foreign Trade in CEEC," EY International Congress on Economics I (EYC2013), October 24-25, 2013, Ankara, Turkey, Ekonomik Yaklasim Association 267, Ekonomik Yaklasim Association.
  3. Anson, José & Boffa, Mauro & Helble, Matthias, 2014. "A Short-Run Analysis of Exchange Rates and International Trade with an Application to Australia, New Zealand, and Japan," ADBI Working Papers, Asian Development Bank Institute 471, Asian Development Bank Institute.
  4. Enzo Cassino & David Oxley, 2013. "How Does the Exchange Rate Affect the Real Economy? A Literature Survey," Treasury Working Paper Series, New Zealand Treasury 13/26, New Zealand Treasury.
  5. Eichengreen, Barry & Gupta, Poonam, 2012. "The Real Exchange Rate and Export Growth: Are Services Different?," Working Papers, National Institute of Public Finance and Policy 12/112, National Institute of Public Finance and Policy.
  6. Brixiova, Zuzana & Ncube, Mthuli, 2014. "The Real Exchange Rate and Growth in Zimbabwe: Does the Currency Regime Matter?," IZA Discussion Papers, Institute for the Study of Labor (IZA) 8398, Institute for the Study of Labor (IZA).
  7. Diego Bastourre & Luis Casanova & Alejo Espora, 2011. "Tipo de Cambio Real y Crecimiento: Síntesis de la Evidencia y Agenda de Investigación," Department of Economics, Working Papers, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata 082, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  8. Juan Marchetti & Michele Ruta & Robert Teh, 2012. "Trade Imbalances and Multilateral Trade Cooperation," CESifo Working Paper Series, CESifo Group Munich 4050, CESifo Group Munich.
  9. Pomfret, Richard & Pontines, Victor, 2013. "Exchange Rate Policy and Regional Trade Agreements: A Case of Conflicted Interests?," ADBI Working Papers, Asian Development Bank Institute 436, Asian Development Bank Institute.
  10. Nasha Ananchotikul & Nuwat Nookhwun & Paiboon Pongpaichet & Songklod Rastapana & Phurichai Rungcharoenkitkul, 2010. "The Future of Monetary Policy: Roles of Financial Stability and Exchange Rate," Working Papers, Economic Research Department, Bank of Thailand 2010-07, Economic Research Department, Bank of Thailand.

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