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Exchange Rate Misalignment and Growth: Old and New Econometric Evidence

Author

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  • Paulo Gala

    (Universidade de São Paulo)

  • Claudio R. Lucinda

    (Universidade de São Paulo)

Abstract

Several studies have tried to identify the relationship between growth and misaligned or overvalued currencies. Many works (Easterly (2001) and Fajnzylber et alii (2002)), find negative correlations between exchange rate misalignment and growth for a long list of developing countries since the seventies; the more overvalued the currency, the smaller the per capita growth rates. Even after controlling the regressions for several types of variables, the studies cannot reject the statistical significance of overvalued exchange rates in explaining growth. This paper presents new econometric evidence for the exchange rate levels and growth relation based on a panel data study for 58 developing countries from 1960 until 1999 using PPP deviation measures. Our main contribution here is to estimate growth regressions with a real exchange rate index that deals with changes in real GDP per capita levels. We use a new overvaluation index that takes into account variations in real per capita incomes, adjusting, thus, our exchange rate estimates for the so-called Balassa-Samuelson effect. By correcting traditional real exchange rate annual estimates for GDP per capita increases, we intend to control our whole series for appreciations due to productivity increases as many authors do for some specific years.

Suggested Citation

  • Paulo Gala & Claudio R. Lucinda, 2006. "Exchange Rate Misalignment and Growth: Old and New Econometric Evidence," Economia, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 7(4), pages 165-187.
  • Handle: RePEc:anp:econom:v:7:y:2006:i:4:p:165-187
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    Cited by:

    1. James Heintz & Robert Pollin, 2008. "Targeting Employment Expansion, Economic Growth and Development in Sub-Saharan Africa: Outlines of an Alternative Economic Programme for the Region," Published Studies targeting_employment_expa, Political Economy Research Institute, University of Massachusetts at Amherst.
    2. Ronald MacDonald & Flávio Vieira, "undated". "A panel data investigation of real exchange rate misalignment and growth," Working Papers 2010_13, Business School - Economics, University of Glasgow.
    3. Comunale, Mariarosaria, 2017. "Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in EU," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 350-370.
    4. Camelia Minoiu & Patrick A. Imam, 2008. "Mauritius; A Competitiveness Assessment," IMF Working Papers 08/212, International Monetary Fund.
    5. Zuzana Brixiov?? & Mthuli Ncube, 2014. "The Real Exchange Rate and Growth in Zimbabwe: Does the Currency Regime Matter?," William Davidson Institute Working Papers Series wp1081, William Davidson Institute at the University of Michigan.
    6. Shehu Usman Rano Aliyu, 2010. "Exchange rate volatility and export trade in Nigeria: an empirical investigation," Applied Financial Economics, Taylor & Francis Journals, vol. 20(13), pages 1071-1084.
    7. Samba Mbaye, 2012. "Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?," Working Papers halshs-00687948, HAL.
    8. Mariarosaria Comunale, 2016. "Dutch Disease, Real Effective Exchange Rate Misalignments and Their Effect on GDP Growh in the EU," CEIS Research Paper 379, Tor Vergata University, CEIS, revised 23 May 2016.
    9. Grekou, Carl, 2015. "Revisiting the nexus between currency misalignments and growth in the CFA Zone," Economic Modelling, Elsevier, vol. 45(C), pages 142-154.
    10. Aderbal Oliveira Damasceno & Flávio Vilela Vieir, 2014. "Desalinhamento Cambial, Volatilidade Cambial E Crescimento Econômico: Uma Análise Para A Economia Brasileira (1995-2011)," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41st Brazilian Economics Meeting] 100, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    11. Mbaye, Samba, 2012. "Currency Undervaluation and Growth: Is there a Productivity Channel?," MPRA Paper 44261, University Library of Munich, Germany.
    12. Audrey Sallenave, 2010. "Real exchange rate misalignments and economic performance for the G20 countries," EconomiX Working Papers 2010-1, University of Paris Nanterre, EconomiX.
    13. Phornchanok Cumperayot & Roy Kouwenberg, 2016. "Currency Wars: Who Gains from the Battle?," PIER Discussion Papers 18., Puey Ungphakorn Institute for Economic Research, revised Feb 2016.
    14. Marcel Schroder, 2013. "Should developing countries undervalue their currencies?," Departmental Working Papers 2013-12, The Australian National University, Arndt-Corden Department of Economics.
    15. Zuzana Brixiová & Mthuli Ncube & Zorobabel Bicaba, 2015. "The Real Exchange Rate and Growth in Emerging Markets: The Case of Zimbabwe," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 564-576, August.
    16. Samba MBAYE, 2012. "Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?," Working Papers 201211, CERDI.
    17. Florian Morvillier, 2018. "The role of exchange rate undervaluations on the inflation-growth nexus," EconomiX Working Papers 2018-15, University of Paris Nanterre, EconomiX.
    18. Zouheir Abida, 2011. "Real Exchange Rate Misalignment and Economic Growth: An Empirical Study for the Maghreb Countries," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 2, pages 45-61, July.
    19. Zuzana Brixiova & Mthuli Ncube, 2014. "Working Paper - 210 - The Real Exchange Rate and Growth in Zimbabwe Does the Currency Regime Matter," Working Paper Series 2146, African Development Bank.
    20. Robert Pollin & James Heintz, 2007. "Expanding Decent Employment in Kenya: The Role of Monetary Policy, Inflation Control, and the Exchange Rate," Country Study 6, International Policy Centre for Inclusive Growth.
    21. Cruz-Rodríguez, Alexis, 2015. "Crecimiento económico y desalineación del tipo de cambio real en la República Dominicana: ¿Hay alguna relación?
      [Economic growth and the real exchange rate misalignments in the Dominican Republic:
      ," MPRA Paper 70974, University Library of Munich, Germany.

    More about this item

    Keywords

    Exchange Rate Levels; Overvaluations; Growth;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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