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Real Exchange Rates and Growth Surges

Author

Listed:
  • Darryl McLeod

    (Fordham University, Department of Economics)

  • Elitza Mileva

    (European Central Bank)

Abstract

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.

Suggested Citation

  • Darryl McLeod & Elitza Mileva, 2011. "Real Exchange Rates and Growth Surges," Fordham Economics Discussion Paper Series dp2011-04, Fordham University, Department of Economics.
  • Handle: RePEc:frd:wpaper:dp2011-04
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    File URL: http://ftp.web.fordham.edu/ECONOMICS_RESEARCH/PAPERS/dp2011_04_mcleod_mileva.pdf
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    References listed on IDEAS

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    Cited by:

    1. Samba Mbaye, 2013. "Currency undervaluation and growth: Is there a productivity channel?," International Economics, CEPII research center, issue 133, pages 8-28.
    2. Wacker, Konstantin M. & Großkurth, Philipp & Lakemann, Tabea, 2014. "Terms of Trade, Foreign Direct Investment, and Development: A Case of Intra-Asian “Kicking Away the Ladder”?," Working Papers on Regional Economic Integration 122, Asian Development Bank.
    3. Bernd Schwaab & Siem Jan Koopman & André Lucas, 2017. "Global Credit Risk: World, Country and Industry Factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(2), pages 296-317, March.
    4. 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.

    More about this item

    Keywords

    Economic growth; total factor productivity growth; exchange rate policy;

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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