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

  • Martin Rapetti

    ()

    (University of Massachusetts Amherst)

  • Peter Skott

    ()

    (University of Massachusetts Amherst)

  • Arslan Razmi

    ()

    (University of Massachusetts Amherst)

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

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Paper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2011-07.

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Date of creation: May 2011
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Handle: RePEc:ums:papers:2011-07
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  1. Ricardo Hausmann & Lant Pritchett & Dani Rodrik, 2004. "Growth Accelerations," NBER Working Papers 10566, National Bureau of Economic Research, Inc.
  2. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  3. 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.
  4. Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
  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. Alvaro Aguirre & César Calderón, 2005. "Real Exchange Rate Misalignments and Economic Performance," Working Papers Central Bank of Chile 316, Central Bank of Chile.
  7. Arslan Razmi & Martin Rapetti & Peter Skott, 2011. "The Real Exchange Rate and Economic Development," UMASS Amherst Economics Working Papers 2011-08, University of Massachusetts Amherst, Department of Economics.
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