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Real Exchange Rates, Valuation Effects and Growth in Emerging Markets

  • Michael Bleaney,
  • Liliana Castilleja Vargas
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    We compare the relationship between net capital inflows, real exchange rate movements and growth for twenty emerging markets and thirteen developed countries over the period 1985-2004. In developed countries low real exchange rates are associated with faster growth, but in emerging markets depreciations depress growth, even outside crisis periods, and are closely correlated with declines or reversals in net capital inflows. To investigate valuation effects of currency movements, we construct debt-weighted real exchange rate indices for emerging markets. We find only limited evidence that the contractionary effects of real depreciations in emerging markets can be attributed to valuation effects.

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    File URL: http://www.nottingham.ac.uk/credit/documents/papers/07-12.pdf
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    Paper provided by University of Nottingham, CREDIT in its series Discussion Papers with number 07/12.

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    Handle: RePEc:not:notcre:07/12
    Contact details of provider: Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
    Phone: (44) 0115 951 5620
    Fax: (0115) 951 4159
    Web page: http://www.nottingham.ac.uk/economics/
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    1. Michael B. Devereux & Philip Lane, 2001. "Exchange Rates and Monetary Policy in Emerging Market Economies," CEG Working Papers 20017, Trinity College Dublin, Department of Economics.
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    5. Hutchison, Michael M. & Noy, Ilan, 2004. "Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow Reversals and Output Loss in Emerging Markets," Santa Cruz Center for International Economics, Working Paper Series qt38j2b036, Center for International Economics, UC Santa Cruz.
    6. International Monetary Fund, 2004. "When in Peril, Retrench; Testing the Portfolio Channel of Contagion," IMF Working Papers 04/131, International Monetary Fund.
    7. Sebastian Edwards, 1985. "Are Devaluations Contractionary?," NBER Working Papers 1676, National Bureau of Economic Research, Inc.
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    9. Gupta, Poonam & Mishra, Deepak & Sahay, Ratna, 2007. "Behavior of output during currency crises," Journal of International Economics, Elsevier, vol. 72(2), pages 428-450, July.
    10. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
    11. Guillermo A. Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 99-118, Fall.
    12. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, vol. 25(7), pages 903-923, 07.
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