Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited

Exchange rate undervaluation and sectoral performance of the South African economy

“…Real misalignment of exchange rates in the form of undervaluation (albeit moderate undervaluation), however, has been found to be desirable for economic growth. Indeed, some empirical studies have found undervaluation to stimulate growth (see Bhalla 2007;Gala 2008;Gluzmann et al 2007;Rodrik 2008). There is even empirical evidence which shows that most Eastern Asian countries, notably, Japan, South Korea, Taiwan, Hong Kong, Singapore, and China have used undervalued currencies to their advantage (see Dollar 1992).…”

On the Effectiveness of Exchange Rate Interventions in Emerging Markets

“…The postponement of depreciations is discussed in Hausmann et al (2000) and in Calvo and Reinhart (2002). The growth motive of keeping a depreciated currency is discussed in Rodrik (2008), and Johnson et al (2010), or Glüzmann et al (2012. For "Dutch disease" type concerns and evidence see Rajan andSubramanian (2011), or Cárdenas et al (2011) for the case of LAC.…”

Measurement matters: Productivity-adjusted weighted average relative price indices

“…Thus, a sudden dollar appreciation (or a decline in the dollar price of a foreign currency) would lead to US prices which are also high relative to their equilibrium value, indicating overvaluation. This is essentially the logic behind a large body of research which studies the impact of exchange rates on the economy using the Balassa-Samuelson residual, including Frankel (2006), Rodrik (2008), Johnson, Ostry, and Subramanian (2010), Stahler and Subramanian (2014), Cheung, Chinn, and Fujii (2010), Nicita (2013), and Glüzmann et al (2012, 2013. While Balassa-Samuelson residuals may be an imperfect measure of competitiveness, these studies generally find that BS residuals are related to economic outcomes.…”

“…For example, Nicita (2013) finds a negative relation between overvaluation and bilateral exports, and also finds a positive relation between having an overvalued residual and protectionism (including both tariff policies and antidumping cases), while Rodrik (2008) finds a negative relation between overvaluation and economic growth. Glüzmann et al (2012Glüzmann et al ( , 2013 argue that the link from undervaluation to growth runs through savings and investment in developing countries. Stahler and Subramanian (2014) offer a dynamic validation for the empirical Penn Effect, as they find that fastergrowing countries also experience faster-growing price levels.…”