Real exchange rate misalignments and economic performance for the G20 countries

Abstract

We evaluate the growth effects of real effective exchange rate misalignments for the G20 countries over the period 1980-2006. To this end, we first estimate real effective equilibrium exchange rates relying on the behavioral approach BEER, from which misalignments are derived. Second, we estimate a dynamic panel growth model in which among the traditional determinants of growth, our measure of misalignments is included. Our findings put forward some important differences between developed and emerging economies. The magnitude of the misalignments is more pronounced in the case of emerging countries, and the speed of convergence towards the estimated equilibrium exchange rate is slower for industrialized ones. Turning to our growth regression analysis, we find that misalignments have a negative effect on the economic growth. As a consequence, an appropriate exchange rate policy would close the gap between real exchange rates and their equilibrium level.

Real exchange rate misalignment and economy

“…The Washington consensus view is that deviation of real exchange rate from the equilibrium level, which is consistent with internal equilibrium and external equilibrium will reduce economy. Internal balance is the level of output consistent with both full employment and sustainable rate of inflation and external balance is a current account which is consistent with external debt and sustainability (Sallenave, 2010). Schröder (2013)…”

“…On the whole, the result supports the Washington consensus view and rejects the idea that the real effective exchange rate undervaluation is a worthwhile policy tool for economic growth. Sallenave (2010) studies the impact of real effective exchange rate misalignment on economic growth of Group of 20 (G20) economies in an annual panel data for the period of 1980-2006. The results demonstrate that real effective exchange rate misalignment has a negative impact on economic growth.…”

The effect of real exchange rate misalignment on economic growth: Evidence from emerging markets

“…This view regards both sorts of RER misalignments. That is, deviations of RER from its equilibrium values in any direction are detrimental from a long-term growth perspective, which has been supported by several empirical studies (Aguirre & Calderon, 2005;Mazorodze, 2021;Sallenave, 2010;Schröder, 2013Schröder, , 2017Toulaboe, 2006). Edwards (1989) was the first pioneer to estimate the impact of RER misalignment on economic growth for 12 developing countries over the period 1962-1984. The study finds misallocation of resources due to the distortions in relative prices of tradable and non-tradable sectors caused by RER misalignment, which damages economic growth.…”

“…That is, a larger size of misalignment leads to a larger decline in economic growth. Sallenave (2010) measures RER misalignments employing the behavioral approach and evaluates its growth effects for the G-20 countries over the period . The findings differ largely from developed to emerging economies-while it marks misalignment is relatively pronounced in Ems.…”

Exchange rate misalignment and economic growth in India

“…Third, although euro is considered as the second best important foreign currency for India's exports and imports, however, owing to lack of availability of data on consumer price index (CPI), real interest rate, total foreign exchange reserves and labour force for euro area, this study restricts its analysis by treating the US dollar as the benchmark currency. Finally, there are few papers in the literature that have used the RER to estimate the ERER, particularly in the context of developing economies (Gala and Lucinda, 2006;Sallenave, 2010;Dai andDelpachitra, 2015, Akram andRath, 2017).…”