Going under to stay on top: How much real exchange rate undervaluation is needed to boost growth in developing countries

  • Cecilia Bermúdez
  • Carlos Dabús

Abstract

This paper explores the real exchange rate (RER)-economic growth relationship
for a wide sample of countries over the period 1960-2009. After removing influential
observations, the system-GMM estimates suggest a positive link between an
undervalued RER and growth in non-industrial countries, particularly in those
with upper-middle and high income levels. In turn, RER volatility is found harmful
for growth. These results holds when testing for asymmetric effects of RER
misalignment: a real undervaluation boosts growth in non-industrial countries,
while overvaluation seems to have no effects at any income level. Besides, the
magnitude of the misalignment is also relevant: an undervalued RER of about
26% on average has a positive impact on growth.
Keywords Economic growth, real exchange rate, exchange rate volatility, non-industrial countries
Compartir
How to Cite
Bermúdez, C., & Dabús, C. (2018). Going under to stay on top: How much real exchange rate undervaluation is needed to boost growth in developing countries. Estudios de Economía, 45(1), 5-28. Retrieved from https://estudiosdeeconomia.uchile.cl/index.php/EDE/article/view/49263/51795
Section
Articles
Published
2018-05-11