Do real exchange rate appreciations matter for growth?

The impact of exchange rate changes on growth – a long-standing key issue in international macroeconomics – has received renewed attention in recent years owing to weaker growth rates and the debate on ‘currency wars’. The connection between real exchange rates and growth remains, however, an unsettled question in the academic literature. We fill this gap by providing an empirical assessment based on a broad sample of emerging and advanced economies. We assess the impact of appreciations, productivity booms and capital inflows surges using a propensity score matching approach to address causality issues. Appreciations associated with higher productivity have a larger impact on growth than those associated with capital inflows. Furthermore, appreciations per se tend to have a negative impact on growth. We provide a simple theoretical model that delivers a contrasted growth-appreciation pattern depending on the underlying shock. The model also implies adverse effects of shocks to international capital flows, so concerns about an appreciation are not inconsistent with concerns about a depreciation. While the presence of an externality through firms’ destruction leads to inefficient allocations, addressing the inefficiency does not dampen exchange rate movements.