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The Real Exchange Rate and Economic Growth: are Developing Countries Different?

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Listed:
  • Martin Rapetti

    () (University of Massachusetts Amherst)

  • Peter Skott

    () (University of Massachusetts Amherst)

  • Arslan Razmi

    () (University of Massachusetts Amherst)

Abstract

Recent research has found a positive relationship between real exchange rate (RER) undervaluation and economic growth. Different rationales for this association have been offered, but they all imply that the mechanisms involved should be stronger in developing countries. Rodrik (2008) explicitly analyzed and found evidence that the RER-growth relationship is more prevalent in developing countries. We show that his finding is very sensitive to the criterion used to divide the sample between developed and developing countries. We then use alternative classification criteria and empirical strategies to evaluate the existence of asymmetries between groups of countries and find that the effect of currency undervaluation on growth is indeed larger and more robust for developing economies. However, the relationship between RER undervaluation and per capita GDP is non-monotonic. JEL Categories: F43, O11

Suggested Citation

  • Martin Rapetti & Peter Skott & Arslan Razmi, 2011. "The Real Exchange Rate and Economic Growth: are Developing Countries Different?," UMASS Amherst Economics Working Papers 2011-07, University of Massachusetts Amherst, Department of Economics.
    • Handle: RePEc:ums:papers:2011-07
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    References listed on IDEAS

    as
    1. Gabriel Porcile & Gilberto Tadeu Lima, 2010. "Real exchange rate and elasticity of labour supply in a balance-of-payments-constrained macrodynamics," Cambridge Journal of Economics, Oxford University Press, vol. 34(6), pages 1019-1039.
    2. Alvaro Aguirre & César Calderón, 2005. "Real Exchange Rate Misalignments and Economic Performance," Working Papers Central Bank of Chile 316, Central Bank of Chile.
    3. Ricardo Hausmann & Lant Pritchett & Dani Rodrik, 2005. "Growth Accelerations," Journal of Economic Growth, Springer, vol. 10(4), pages 303-329, December.
    4. Ronald MacDonald & Flávio Vieira, "undated". "A panel data investigation of real exchange rate misalignment and growth," Working Papers 2010_13, Business School - Economics, University of Glasgow.
    5. Paulo Gala, 2008. "Real exchange rate levels and economic development: theoretical analysis and econometric evidence," Cambridge Journal of Economics, Oxford University Press, vol. 32(2), pages 273-288, March.
    6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    7. Razmi, Arslan & Rapetti, Martin & Skott, Peter, 2012. "The real exchange rate and economic development," Structural Change and Economic Dynamics, Elsevier, vol. 23(2), pages 151-169.
    8. 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.
    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.
    10. Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
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    More about this item

    Keywords

    real exchange rates; undervaluation; growth; developing countries.;

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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