The growth and exchange rate nexus: The role of global value chains

Although many believe competitive currencies or real exchange rate undervaluation boost growth, recent research shows that the magnitude of this impact varies across countries. Since their integration into global value chains (GVCs) in the 1980s, a group of peripheral countries has transformed their export patterns. GVCs involve splitting production across several firms and countries. Many peripheral countries highly integrated into GVCs tend to present high backward-GVC participation. This means that imported inputs account for a significant share of the country's exports. This paper thus examines whether different levels of backward participation in GVCs alter the nexus between growth and competitive currencies within peripheral countries. The paper argues that in peripheral countries with high backward participation in GVCs, the growth impact of real exchange rate undervaluation will be lower. This is because higher backward-GVC participation implies less domestic value-added in a country's exports. Therefore, a lower share of domestic value-added is impacted by the competitiveness boost of real exchange rate undervaluation. Panel data regressions with annual data from up to 92 peripheral countries between 1950 and 2017 back the paper's argument.