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Real Exchange Rates and Growth Surges

  • Darryl McLeod

    (Fordham University, Department of Economics)

  • Elitza Mileva

    (European Central Bank)

Maintaining a weak real exchange rate is a widely recommended growth strategy, in part because of the success of Asian exporters, most recently China. Simulations of a simple two-sector open economy growth model based on Matsuyama (1992) suggest that a weaker real exchange rate can lead to a "growth surge", as workers move into traded goods industries with more "learning by doing" and exit non-traded goods sectors with slower productivity growth. Using the updated total factor productivity (TFP) estimates from Bosworth and Collins (2003) we test this model in a panel of 58 countries. We find the anticipated non-linear relationship between the real exchange rate and TFP growth: beyond a certain point real currency depreciation reduces TFP and GDP growth. Manufacturing exports appear to be one channel via which the real exchange rate affects TFP growth. Fears that a weaker real exchange rate might reduce investment and therefore productivity growth by making imported equipment more expensive are not supported by our estimates.

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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2011-04.

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Date of creation: 2011
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Handle: RePEc:frd:wpaper:dp2011-04
Contact details of provider: Web page: http://www.fordham.edu/economics/
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