12. The Real Exchange Rate and Economic Growth: Some Observations on the Possible Channels

Abstract

A recent body of empirical research has documented a strong association between the level and volatility of the RER and economic growth. This research has relied on a variety of econometric techniques applied to large cross-country data sets. Although the documented positive effects of both RER competitiveness and stability on growth appear to be robust, it is still unclear what the mechanisms driving these associations are. Several explanations have been proposed, but their theoretical examination and empirical validation is still in an infant stage. I analyze the mechanisms that have been proposed and evaluate them in light of the documented empirical evidence. My reading is that two of them adjust to the empirical findings best: the financial globalization channel and the tradable-led growth channel. I conclude that since these mechanisms are not mutually exclusive, both might have some explanatory power. JEL: O24, F43, F31, O11.

Central Bank Policies in Mexico: Targets, Instruments, and Performance

“…As a result, there is an abundant literature that documents a positive relationship between the real exchange rate and the rate of economic growth (see Rapetti, 2012;Ros, 2014b, for a review of this literature) or that finds empirically that avoiding overvaluation of the real exchange rate is associated with a longer duration of high growth rates in large international panel studies (see, eg, Berg et al, 2012).…”

Macroeconomic Policy in Argentina During 2002–2013

“…Conceptually, a developing economy has a 'competitive' RER level when the modern (or non-traditional) tradable sector reaches a risk-adjusted profit rate that is at least equal to that of the same sector in a developed economy. See Rapetti (2013a) for further details. also favors investment.…”

Profit margins, exchange rates and structural change: empirical evidences for the period 1996-2017

“…According to a wide range of literature, the devaluation of the exchange rate exerts a positive effect on growth and economic development, as argued by Ferrari, Freitas & Barbosa-Filho (2013), Guzman, Ocampo & Stiglitz (2018), Rapetti (2016) and Rodrik (2008). These authors emphasize the role of the exchange rate level on the expansion of exports and investments, but they do not explore the channels that may lead to such results.…”