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The real exchange rate and economic growth: Revisiting the case using external instruments

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  • Habib, Maurizio Michael
  • Mileva, Elitza
  • Stracca, Livio

Abstract

We investigate the impact of movements in the real exchange rate on economic growth based on five-year average data for a panel of over 150 countries in the post Bretton Woods period. Unlike previous literature, we use external instruments to deal with possible reverse causality from growth to the real exchange rate. Our country-specific instruments are (i) global capital flows interacted with individual countries’ financial openness and (ii) the growth rate of official reserves. We find that a real appreciation (depreciation) reduces (raises) significantly annual real GDP growth, more than in previous estimates in the literature. However, our results confirm this effect only for developing countries and for pegs.

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  • Habib, Maurizio Michael & Mileva, Elitza & Stracca, Livio, 2017. "The real exchange rate and economic growth: Revisiting the case using external instruments," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 386-398.
  • Handle: RePEc:eee:jimfin:v:73:y:2017:i:pb:p:386-398
    DOI: 10.1016/j.jimonfin.2017.02.014
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    More about this item

    Keywords

    Real exchange rate; Economic growth; Instrumental variables; Panel data;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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