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Exchange Rate Misalignment And Growth: Old And New Econometric Evidence

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  • Paulo Gala
  • Claudio R. Lucinda

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.
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  • Paulo Gala & Claudio R. Lucinda, 2006. "Exchange Rate Misalignment And Growth: Old And New Econometric Evidence," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 93, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
  • Handle: RePEc:anp:en2006:93
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    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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