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Currency Misalignments and Economic Growth: The Foreign Currency-Denominated Debt Channel

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  • Carl Grekou

Abstract

The literature on the growth effects of currency misalignments, although prolifi c, revolves around two main axes: the export-oriented growth literature which attributes positive effects to undervaluations (competitiveness gains) and the Washington Consensus view according to which any deviations from equilibrium hamper economic growth. In this paper, relying on a panel of 70 developing and emerging countries, we evidence the existence of a foreign currencydenominated debt channel through which misalignments impact growth. Compared to the traditional competitiveness channel, this channel works in the opposite direction. In particular, we show that, unlike overvaluations, undervaluations are more likely to cause valuation effects that tend to dampen the competitiveness effect. The paper therefore reconciles the two strands of the literature: undervaluations may have indeed a positive growth effect, but it is crucial to take into account the possible costs related to these undervaluations to have a clearer picture of the net total effect.

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  • Carl Grekou, 2018. "Currency Misalignments and Economic Growth: The Foreign Currency-Denominated Debt Channel," Working Papers 2018-12, CEPII research center.
  • Handle: RePEc:cii:cepidt:2018-12
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    4. Florian Morvillier, 2018. "The role of exchange rate undervaluations on the inflation-growth nexus," EconomiX Working Papers 2018-15, University of Paris Nanterre, EconomiX.

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    More about this item

    Keywords

    Equilibrium Exchange Rate; Currency Misalignments; Debt; Valuation Effects; Economic Growth;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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