IDEAS home Printed from https://ideas.repec.org/p/new/wpaper/1609.html
   My bibliography  Save this paper

Real Exchange Rate, Effective Demand, and Economic Growth: Theory and Empirical Evidence for Developed and Developing Countries, 1960-2010

Author

Listed:
  • Francisco A. Martínez-Hernández

    () (Department of Economics, State University of New York New Paltz)

Abstract

This paper seeks to assess the effects of an undervalued currency on economic growth. Based on a reformulation of Rodrik’s undervaluation index, our econometric results suggest that real exchange rate undervaluation has, to differing degrees, been able to enhance the economic growth of developed and developing countries. Nevertheless, when we disaggregate the main components of aggregate demand for different clusters of developed and developing countries using the Stock Flow Consistent approach (SFC), we find that in general, an undervalued currency has expansionary and contractionary effects in the short-run, specifically via the export sector and the level of aggregate consumption, respectively. This paper also estimates the effects of an undervalued currency on the level of investment and the trade balance.

Suggested Citation

  • Francisco A. Martínez-Hernández, 2016. "Real Exchange Rate, Effective Demand, and Economic Growth: Theory and Empirical Evidence for Developed and Developing Countries, 1960-2010," Working Papers 1609, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1609
    as

    Download full text from publisher

    File URL: http://www.economicpolicyresearch.org/econ/2016/NSSR_WP_092016.pdf
    File Function: First version, 2016
    Download Restriction: no

    References listed on IDEAS

    as
    1. Chang, Ha-Joon, 2006. "Industrial policy in East Asia - lessons for Europe," EIB Papers 11/2006, European Investment Bank, Economics Department.
    2. Andrew Berg & Yanliang Miao, 2010. "The Real Exchange Rate and Growth Revisited; The Washington Consensus Strikes Back?," IMF Working Papers 10/58, International Monetary Fund.
    3. Dani Rodrik, 2008. "The Real Exchange Rate and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 365-439.
    4. Arvind Subramanian & Jonathan David Ostry & Simon Johnson, 2007. "The Prospects for Sustained Growth in Africa; Benchmarking the Constraints," IMF Working Papers 07/52, International Monetary Fund.
    5. Julio Lopez & Ignocio Perrotini Perrotini, 2006. "On floating exchange rates, currency depreciation and effective demand," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 221-242.
    6. Robert A. Blecker & Arslan Razmi, 2008. "The fallacy of composition and contractionary devaluations: output effects of real exchange rate shocks in semi-industrialised countries," Cambridge Journal of Economics, Oxford University Press, vol. 32(1), pages 83-109, January.
    7. Jamee K. Moudud, 2010. "Strategic Competition, Dynamics, and the Role of the State," Books, Edward Elgar Publishing, number 4241, December.
    8. Julio Lopez & Ignocio Perrotini Perrotini, 2006. "On floating exchange rates, currency depreciation and effective demand," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 221-242.
    9. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Undervalued Currency; Developed and Developing Countries; Effective Demand Components; Economic Growth; Panel Data Models;

    JEL classification:

    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:new:wpaper:1609. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Setterfield). General contact details of provider: http://edirc.repec.org/data/denewus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.