Exchange rate misalignment and economic growth: evidence from nonlinear panel cointegration and granger causality tests

Abstract

We analyse the impact of exchange rate misalignment on economic growth for a sample of emerging economies from 1970 to 2014 using a panel smooth transition regression vector error correction model. Besides, we provide a granger causality test conducted in a non-linear framework. We find that a rise in misalignment increases significantly the output in the short-run when currencies are close to equilibrium. When they are highly misaligned, the impact on growth is reduced. However, no significant impact of output on misalignment was found in the short-run. We provide evidence that misalignment granger causes the output at any given level of misalignment both in the short and long-run. Weaker granger causality was found between output and misalignment. This raises some important policy implications. Although emerging economies can use undervaluation as a growth strategy, the benefits are smaller when currencies are highly undervalued. There is, therefore, an incentive to keep exchange rates closer to their equilibrium.

Exchange rate misalignment and economic growth: On the possible transmission channels for emerging economies

“…Additional covariates are used. From Table 10, we can note that our variable of interest is positive and significant in all three Tipoy et al (2017b). 2.…”

“…We use various estimators besides the usual panel data fixed effects (FE). The index of exchange rate undervaluation, which comes from the work of Tipoy, Breitenbach, and Zerihun (2017b), is computed using the cross-section autoregressive distributed lag (CS-ARDL) of Chudik, Mohaddes, Pesaran, and Raissi (2016). This estimator is robust to crosssectional dependence.…”

“…We graph side by side our misalignment index and the industry VA, a proxy for the size of the tradable sector, for selected countries in Figure 1 of the appendix from 1970 to 2014. The misalignment index is from the work of Tipoy et al (2017b) and estimated using the parsimonious model of Alberola (2003), and the industry VA is from the World Bank Development indicators. Looking at Argentina, the undervaluation index tracks somewhat the tradable sector movement.…”

Purchasing Power Parity Approach to Exchange Rate Misalignment in Nigeria

“…The effect of misalignments on economic activity seems to be nonlinear extending to other variables, including institutions. Similarly, Tipoy, Breitenbach and Zerihun (2018), sought to find the impact of misaligned exchange rates on economic growth for a sample of emerging economies using data from 1970 to 2014 and a panel smooth transition regression vector error correction model in addition to a Granger causality test within a nonlinear framework. They found that exchange rate misalignment affects output in both short and long run particularly when the currency is overvalued.…”

The Impacts of the Dollar-Renminbi Exchange Rate Misalignment on the China-United States Commodity Trade: An Asymmetric Analysis

“…A review of the literature 5 reveals that most studies dealing with the impacts of real exchange rate (RE) misalignment on trade flows of the United States with China (or other country studies) 6 have implicitly supposed that the impacts of RE misalignment on imports and exports are symmetric. A great number of recent empirical studies, however, suggests that the effects of RE misalignment on economic activity in general, and on trade flows in particular, are likely to be asymmetric (Béreauet al, 2012;Couharde, and Sallenave, 2013;Allegret and Sallenave, 2014;Tipoy and Zerihun, 2017;Wong, 2019;Cuestas et al, 2020). For example, Allegret and Sallenave (2014) estimated a GVAR model to assess the impacts of exchange rate misalignment on global imbalances for 15 developed and emerging economies using data for the 1980-2010 period.…”