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Reconciling contrasting views on the growth effect of currency misalignments

Author

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  • Couharde, Cécile
  • Grekou, Carl
  • Mignon, Valérie
  • Morvillier, Florian

Abstract

This paper provides an in-depth analysis of the link between exchange rate misalignments and economic growth for a large sample of 170 countries over the 1973-2019 period. Although any significant departures from the equilibrium exchange rate levels are found undesirable, we show that undervaluations are more likely to stimulate economic growth in developing countries. However, this positive impact is observed only up to certain thresholds of development level and currency undervaluation. Consequently, strategies in developing countries that systematically undervalue currencies in real terms to foster growth should be carefully tailored, as they raise the risk for these economies of switching from a positive to a less favorable growth regime, depending on both their specific wealth level and the extent of their currency undervaluation.

Suggested Citation

  • Couharde, Cécile & Grekou, Carl & Mignon, Valérie & Morvillier, Florian, 2025. "Reconciling contrasting views on the growth effect of currency misalignments," Journal of International Money and Finance, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:jimfin:v:151:y:2025:i:c:s0261560624002249
    DOI: 10.1016/j.jimonfin.2024.103237
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    More about this item

    Keywords

    Cross-quantile regressions; Economic growth; Multilateral currency misalignments; Undervaluations;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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