Desperately seeking the positive impact of undervaluation on growth

“…Indeed, for a decade, some economists have refreshed an idea that has been discussed extensively in the post war literature: an active exchange rate undervaluation strategy can efficiently stimulate growth. 2 The revival of this idea has since triggered an intense debate opposing advocators of this claim (Aguirre and Calderòn, 2005;Rodrik, 2008, inter alia), to more skeptical economists (Woodford, 2009;Nouira and Sekkat, 2012).…”

Section: Introductionmentioning

confidence: 99%

Currency undervaluation and growth: Is there a productivity channel?

Mbaye

2013

International Economics

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Undervaluation of the currency is generally believed to affect growth through two main transmission channels: the "capital accumulation channel" and the "total factor productivity (TFP) growth channel". This paper carries out the first empirical investigation on the TFP growth channel. More specifically, we provide answers to the three following questions: Does undervaluation of the currency boost the overall productivity level in the economy? If so, does this "undervaluation-induced" productivity improvement significantly enhance growth?And finally, what is the magnitude of the TFP growth channel compared to the capital accumulation channel? The analysis is conducted on a panel of 72 countries over 1970-2008. The results give strong support to the TFP growth channel: a 10% increase in undervaluation enhances growth on average by 0.14% via an improvement in productivity. Most interestingly, our estimates suggest that this channel conveys the most important part of the growth-enhancing effect of undervaluation. The model has been subject to various robustness checks to support these findings.JEL Classification: F31, O47 . Another recent line of literature has also highlighted the existence of asymmetric effects regarding the impact of overvaluation and undervaluation on growth (see Béreau et al., 2012 for example)

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“…critique-raised for example by Nouira and Sekkat (2012)-that the results of growth regressions may be biased by the predominance of one RER regime over the other. 4 Using the above decomposition, the paper presents two sets of estimations: one for the growth rate of the net private non-residential capital stock (or capital accumulation rate, for short), and the other for the level of gross private fixed capital formation (or private investment level).…”

Section: Methodsmentioning

confidence: 99%

Asymmetric real-exchange-rate effects on capital accumulation: evidence from non-linear ARDL models for Mexico

Ibarra

2018

Lat Am Econ Rev

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According to recent development studies, a depreciated real-exchange-rate (RER) level can increase the rate of economic growth, particularly so in developing countries and in the medium run. But although many studies have supported this proposition, others have questioned it: a depreciated RER may facilitate but not ensure faster growth; or appreciations may hurt growth while depreciations play a more neutral role; or both appreciations and depreciations relative to an equilibrium level may in fact decelerate growth.Mexico, with its history of wide RER fluctuations and protracted appreciation trends, has not been immune to these controversies. But while different studies have reached contradictory results, none has tried to establish why this is so. The possible role of asymmetries, in particular, has not been properly studied. While there may be some consensus around the negative growth effects of appreciations, for example, the possibility of positive effects from depreciations remains more controversial. AbstractThe paper studies the effects of the real exchange rate (RER) on capital accumulation in Mexico in the period since the late 1980s. By testing for the existence of potential asymmetries, the paper seeks to clarify some of the controversies surrounding the subject. It shows the RER's long-run effects to be qualitatively symmetric but quantitatively asymmetric; thus, while appreciations slow accumulation, depreciations accelerate it, but to a lesser degree. Depreciations, moreover, have dynamically asymmetric effects, expansionary in the long run but contractionary in the short run. The effects are derived from non-linear autoregressive distributed lag models for the private capital accumulation rate in the manufacturing, tradables, and non-tradables sectors, and for the aggregate level of private fixed investment. The results help to reconcile the contradictory conclusions reached by previous studies of Mexico, and to clarify the potential role of the real exchange rate as either barrier or engine of growth. which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

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Desperately seeking the positive impact of undervaluation on growth

Cited by 51 publications

References 35 publications

Exchange rate misalignment and export diversification in developing countries

Exchange rate misalignment and export diversification in developing countries

Currency undervaluation and growth: Is there a productivity channel?

Asymmetric real-exchange-rate effects on capital accumulation: evidence from non-linear ARDL models for Mexico

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