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Exchange Rate Misalignment and Economic Growth

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  • Dubas, Justin

Abstract

This paper explores how exchange rate misalignment may impact economic growth and development. Using PDOLS estimation to arrive at a measure of misalignment and employing standard growth regressions, a number of interesting results emerge. This paper finds that exchange rate misalignment has asymmetric effects. Specifically, overvaluation significantly hurts growth while undervaluation has the opposite effect (though statistically insignificant). Misalignment affects developed and developing countries differently in that developing countries are more sensitive to the growth effects of misalignment. Finally, the persistence of misalignment matters. Continuing misalignment of either variety are harmful for growth. This suggests that it is not a viable strategy for a country to intentionally undervalue a currency with the aim of improving the competitiveness of the export sector. In the end, it seems clear that a country needs to limit misalignment and maintain an exchange rate that is closely in line with the equilibrium rate.

Suggested Citation

  • Dubas, Justin, 2012. "Exchange Rate Misalignment and Economic Growth," MPRA Paper 63417, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:63417
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    References listed on IDEAS

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    Cited by:

    1. Ferdinand Owoundi & Jacques Landry Bikai, 2021. "On the neutrality of the exchange rate regime regarding real misalignments: Evidence from sub‐Saharan Africa," Bulletin of Economic Research, Wiley Blackwell, vol. 73(3), pages 327-345, July.
    2. Slimani, Slah & Ben allem, Khaoula, 2017. "Les déterminants du misalignement du taux de change réel : Analyse empirique pour le cas de la région MENA [Determinants of misalignment of the real exchange rate: An empirical analysis for the MEN," MPRA Paper 81247, University Library of Munich, Germany.
    3. Waqar Khalid & Javed Iqbal & Nosheen Nasir & Misbah Nosheen, 2024. "Do real exchange rate misalignments have threshold effects on economic growth? Asymmetric evidence from Pakistan," Economic Change and Restructuring, Springer, vol. 57(6), pages 1-40, December.
    4. Khalid, Waqar & Civcir, Irfan & Özdeşer, Hüseyin & Iqbal, Javed, 2023. "The asymmetric impact of real exchange rate misalignment on growth dynamics in Turkey," Journal of Policy Modeling, Elsevier, vol. 45(6), pages 1184-1203.
    5. repec:cii:cepiei:2015-q1-141-8 is not listed on IDEAS
    6. Slimani, Slah & Ben Allem, Khawla, 2018. "Determinants of real exchange rate misalignment: An empirical analysis for MENA region," MPRA Paper 91605, University Library of Munich, Germany.

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    More about this item

    Keywords

    exchange rate misalignment; overvaluation; economic growth;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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