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Currency Misalignments and Growth: a New Look Using Nonlinear Panel Data Methods

  • Sophie Béreau
  • Antonia Lopez Villavicencio
  • Valérie Mignon

The aim of this paper is to investigate the link between currency misalignments and economic growth. Relying on panel cointegration techniques, we calculate real exchange rate (RER) misalignments as deviations of actual RERs from their equilibrium values for a set of advanced and emerging economies. Estimating panel smooth transition regression models, we show that RER misalignments have a differentiated impact on economic growth depending on their sign: whereas overvaluations negatively affect economic growth, real exchange rate undervaluations significantly enhance it. This result indicates that undervaluations may drive the exchange rate to a level that encourages exports and promotes growth.

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Paper provided by CEPII research center in its series Working Papers with number 2009-17.

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Date of creation: Sep 2009
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Handle: RePEc:cii:cepidt:2009-17
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