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Real exchange rates, saving and growth : is there a link ?

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Author Info
Montiel, Peter J.
Serven, Luis

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Abstract

The view that policies directed at the real exchange rate can have an important effect on economic growth has been gaining adherents in recent years. Unlike the traditional"misalignment"view that temporary departures of the real exchange rate from its equilibrium level harm growth by distorting a key relative price in the economy, the recent literature stresses the growth effects of the equilibrium real exchange rate itself, with the claim being that a depreciated equilibrium real exchange rate promotes economic growth. While there is no consensus on the precise channels through which this effect is generated, an increasingly common view in policy circles points to saving as the channel of transmission, with the claim that a depreciated real exchange rate raises the domestic saving rate -- which in turn stimulates growth by increasing the rate of capital accumulation. This paper offers a preliminary exploration of this claim. Drawing from standard analytical models, stylized facts on saving and real exchange rates, and existing empirical research on saving determinants, the paper assesses the link between the real exchange rate and saving. Overall, the conclusion is that saving is unlikely to provide the mechanism through which the real exchange rate affects growth.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4636.

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Date of creation: 01 May 2008
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Handle: RePEc:wbk:wbrwps:4636

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Keywords: Macroeconomic Management; Economic Stabilization; Debt Markets; Emerging Markets; Currencies and Exchange Rates;

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  2. Pierre-Richard Agenor & Joshua Aizenman, 2000. "Savings and the Terms of Trade Under Borrowing Constraints," NBER Working Papers 7743, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Jose De Gregorio & Holger C. Wolf & Alberto Giovannini, 1994. "International Evidence on Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
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  4. Schmidt-Hebbel, Klaus & Serven, Luis & Solimano, Andres, 1996. "Saving and Investment: Paradigms, Puzzles, Policies," World Bank Research Observer, Oxford University Press, vol. 11(1), pages 87-117, February.
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  6. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 239-263, May. [Downloadable!] (restricted)
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  7. Ghura, Dhaneshwar & Grennes, Thomas J., 1993. "The real exchange rate and macroeconomic performance in Sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 42(1), pages 155-174, October. [Downloadable!] (restricted)
  8. Jeffrey Frankel, 2005. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," NBER Working Papers 11274, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Hausmann, Ricardo & Rodrik, Dani, 2003. "Economic development as self-discovery," Journal of Development Economics, Elsevier, vol. 72(2), pages 603-633, December. [Downloadable!] (restricted)
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  10. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October. [Downloadable!] (restricted)
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  11. Hamid Faruqee & Aasim M. Husain, 1995. "Saving Trends in Southeast Asia: A Cross-Country Analysis," IMF Working Papers 95/39, International Monetary Fund.
  12. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May. [Downloadable!] (restricted)
  13. Jappelli, Tullio & Pagano, Marco, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 83-109, February. [Downloadable!] (restricted)
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  14. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1998. "The Feldstein-Horioka Puzzle and Capital Mobility: A Review," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(2), pages 169-88, April. [Downloadable!] (restricted)
  15. Eswar Prasad & Raghuram G. Rajan & Arvind Subramanian, 2006. "Patterns of international capital flows and their implications for economic development," Proceedings, Federal Reserve Bank of Kansas City, pages 119-158. [Downloadable!]
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  1. Freund, Caroline & Pierola, Martha Denisse, 2008. "Export surges : the oower of a competitive currency," Policy Research Working Paper Series 4750, The World Bank. [Downloadable!]
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