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Do real exchange rate appreciations matter for growth?

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  • Matthieu Bussière
  • Claude Lopez
  • Cédric Tille

Abstract

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.

Suggested Citation

  • Matthieu Bussière & Claude Lopez & Cédric Tille, 2015. "Do real exchange rate appreciations matter for growth?," Economic Policy, CEPR;CES;MSH, vol. 30(81), pages 5-45.
  • Handle: RePEc:oup:ecpoli:v:30:y:2015:i:81:p:5-45.
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    File URL: http://hdl.handle.net/10.1093/epolic/eiu005
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    Cited by:

    1. Laura Alfaro & Alejandro Cuñat & Harald Fadinger & Yanping Liu, 2017. "The Real Exchange Rate, Innovation and Asymmetries and Hysteresis," Harvard Business School Working Papers 18-044, Harvard Business School, revised May 2018.
    2. 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.
    3. Pedro Bação & António Portugal Duarte & Diana Machado, 2016. "Exchange Rates, the Competitiveness of Nations and Unemployment," GEMF Working Papers 2016-14, GEMF, Faculty of Economics, University of Coimbra.
    4. Luca Papi & Andrea F Presbitero & Alberto Zazzaro, 2015. "IMF Lending and Banking Crises," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(3), pages 644-691, November.
    5. Benigno, Gianluca & Converse, Nathan & Fornaro, Luca, 2015. "Large capital inflows, sectoral allocation, and economic performance," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 60-87.
    6. 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.
    7. Belke, Ansgar & Volz, Ulrich, 2018. "The Yen Exchange Rate and the Hollowing-out of Japanese Industry," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181613, Verein für Socialpolitik / German Economic Association.
    8. Antonia López-Villavicencio & Marc Pourroy, 2017. "IT Countries: A Breed Apart? the case of Exchange Rate Pass-Through," Working Papers 1728, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    9. Dennis P Botman & Irineu E de Carvalho Filho & Waikei R Lam, 2013. "The Curious Case of the Yen as a Safe Haven Currency; A Forensic Analysis," IMF Working Papers 13/228, International Monetary Fund.
    10. Duygu Yolcu Karadam & Erdal Özmen, 2016. "Real Exchange Rates and Growth," ERC Working Papers 1609, ERC - Economic Research Center, Middle East Technical University, revised Sep 2016.
    11. repec:sae:niesru:v:244:y:2018:i:1:p:r30-r38 is not listed on IDEAS
    12. MASUJIMA Yuki, 2019. "Time-Variant Safe-Haven Currency Status and Determinants," Discussion papers 19048, Research Institute of Economy, Trade and Industry (RIETI).
    13. Laura Alfaro & Alejandro Cuñat & Harald Fadinger & Yanping Liu, 2018. "The Real Exchange Rate, Innovation and Productivity: Regional Heterogeneity, Asymmetries and Hysteresis," NBER Working Papers 24633, National Bureau of Economic Research, Inc.
    14. Pablo Anaya & Stefan Hasenclever, 2018. "The Macroeconomic Effects of Exchange Rate Movements," DIW Roundup: Politik im Fokus 121, DIW Berlin, German Institute for Economic Research.
    15. Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series iiisdp438, IIIS.
    16. 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.
    17. Kristin Forbes, 2016. "Much Ado about Something Important: How do Exchange Rate Movements Affect Inflation?," Manchester School, University of Manchester, vol. 84(S1), pages 15-41, September.
    18. Alfaro, Laura & Cunat, Alejandro & Fadinger, Harald & Yanping, Liu, 2017. "The real exchange rate, innovation and productivity," Working Papers 17-04, University of Mannheim, Department of Economics.
    19. Weneyam Hippolyte Balima & Jean-Louis Combes & Alexandru Minea, 2016. "Bond Markets Initiation and Tax Revenue Mobilization in Developing Countries," Southern Economic Journal, Southern Economic Association, vol. 83(2), pages 550-572, October.
    20. repec:usg:auswrt:2017:68:01:63-82 is not listed on IDEAS
    21. Erick Lahura & Marco Vega, 2013. "Asymmetric effects of FOREX intervention using intraday data: evidence from Peru," BIS Working Papers 430, Bank for International Settlements.
    22. Alfaro, Laura & Asis, Gonzalo & Chari, Anusha & Panizza, Ugo, 2019. "Corporate debt, firm size and financial fragility in emerging markets," Journal of International Economics, Elsevier, vol. 118(C), pages 1-19.
    23. MASUJIMA Yuki, 2017. "Safe Haven Currency and Market Uncertainty: Yen, renminbi, dollar, and alternatives," Discussion papers 17048, Research Institute of Economy, Trade and Industry (RIETI).
    24. Coricelli, Fabrizio & Ravasan, Farshad R & Wörgötter, Andreas, 2013. "The origins of the German current account surplus: Unbalanced productivity growth and structural change," CEPR Discussion Papers 9527, C.E.P.R. Discussion Papers.
    25. repec:oup:ecpoli:v:33:y:2018:i:94:p:225-264. is not listed on IDEAS

    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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