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Can Real Exchange Rate Undervaluation Boost Exports and Growth in Developing Countries? Yes, But Not for Long

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  • Mona Haddad
  • Cosimo Pancaro

Abstract

A policy of managed real undervaluation may have been an important factor behind the success of East Asia’s export-led growth model. But current discussions over the value of China’s currency demonstrate the controversy this kind of policy can generate. Although a managed real undervaluation can enhance domestic competitiveness, it is difficult to sustain—both economically and politically—in the post-crisis environment. We show that a real undervaluation works only for low-income countries, and only in the medium term.

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Paper provided by The World Bank in its series World Bank Other Operational Studies with number 10178.

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Date of creation: Jun 2010
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Handle: RePEc:wbk:wboper:10178
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Keywords: Finance and Financial Sector Development - Debt Markets Macroeconomics and Economic Growth - Macroeconomic Management Macroeconomics and Economic Growth - Economic Stabilization Finance and Financial Sector Development - Currencies and Exchange Rates Poverty Reduction - Achieving Shared Growth;

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Find related papers by JEL classification:
  • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • F3 - International Economics - - International Finance

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  1. 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.
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  5. Luis Servén, 2003. "Real-Exchange-Rate Uncertainty and Private Investment in LDCS," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 212-218, February.
  6. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
  7. Mckenzie, Michael D., 1998. "The impact of exchange rate volatility on Australian trade flows," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(1), pages 21-38, January.
  8. William Easterly, 2003. "National Policies and Economic Growth: A Reappraisal," Working Papers 27, Center for Global Development.
  9. Chit, Myint Moe & Rizov, Marian & Willenbockel, Dirk, 2008. "Exchange Rate Volatility and Exports: New Empirical Evidence from the Emerging East Asian Economies," MPRA Paper 9014, University Library of Munich, Germany.
  10. Korinek, Anton & Servén, Luis, 2016. "Undervaluation through foreign reserve accumulation: Static losses, dynamic gains," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 104-136.
  11. Sauer, Christine & Bohara, Alok K, 2001. "Exchange Rate Volatility and Exports: Regional Differences between Developing and Industrialized Countries," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 133-52, February.
  12. Alvaro Aguirre & César Calderón, 2005. "Real Exchange Rate Misalignments and Economic Performance," Working Papers Central Bank of Chile 316, Central Bank of Chile.
  13. Luis Servén, 2003. "ERRATUM: Real-Exchange-Rate Uncertainty and Private Investment in LDCs," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 492-492, May.
  14. Bleaney, Michael & Greenaway, David, 2001. "The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 65(2), pages 491-500, August.
  15. Arize, Augustine C & Osang, Thomas & Slottje, Daniel J, 2000. "Exchange-Rate Volatility and Foreign Trade: Evidence from Thirteen LDC's," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 10-17, January.
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