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

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  • Montiel, Peter J.
  • Serven, Luis

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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Bibliographic Info

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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Citations

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Cited by:
  1. Smith, Constance E., 2011. "External balance adjustment: An intra-national and international comparison," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1195-1213, October.
  2. Petri Böckerman & Mika Maliranta, 2013. "Outsourcing, Occupational Restructuring, and Employee Well-Being: Is There a Silver Lining?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 52(4), pages 878-914, October.
  3. Luigi Bonatti & Andrea Fracasso, 2009. "The evolution of the Sino-American Co-dependency: modelling a regime switch in a growth setting," Department of Economics Working Papers 0905, Department of Economics, University of Trento, Italia.
  4. Robert A. Blecker & Arslan Razmi, 2009. "Export-led growth, real exchange rates and the fallacy of composition," Working Papers 2009-22, American University, Department of Economics.
  5. Lin, Justin Yifu & Monga, Celestin, 2010. "The growth report and new structural economics," Policy Research Working Paper Series 5336, The World Bank.
  6. World Bank, 2011. "Turkey - Country Economic Memorandum (CEM) : Sustaining High Growth - The Role of Domestic savings : Synthesis Report," World Bank Other Operational Studies 12264, The World Bank.
  7. Freund, Caroline & Pierola, Martha Denisse, 2008. "Export surges : the oower of a competitive currency," Policy Research Working Paper Series 4750, The World Bank.
  8. Blanchard, Emily & Willmann, Gerald, 2011. "Escaping a protectionist rut: Policy mechanisms for trade reform in a democracy," Journal of International Economics, Elsevier, vol. 85(1), pages 72-85, September.

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