Going Under to Stay on Top: How much real exchange rate undervaluation is needed to boost growth in emerging countries

DABÚS, CARLOS; BERMÚDEZ, CECILIA

Niterói

Seminario; Seminario de Pesquisa do PPGE; 2016

Programa Pós-graduação em Economia - Universidad Federal Fluminense

This paperexplores the real exchange rate (RER)-economic growth relationship for a widesample of countries over the period 1960-2009. After removing influentialobservations, the system-GMM estimates suggest a positive link between anundervalued RER and growth in non-industrial countries, particularly in thosewith upper-middle and high income levels. Also RER volatility is found harmfulfor growth. These results holds when testing for asymmetric effects of RERmisalignment: a real undervaluation boosts growth in non-industrial countries,while overvaluation seems to have no effects at any income level. In turn, themagnitude of the misalignment is also relevant: an undervalued RER of about 26%on average has a positive impact on growth.