The real exchange rate and economic growth: are developing countries different?

Abstract

Recent research has found a positive relationship between real exchange rate (RER) undervaluation and economic growth. Different rationales for this association have been offered, but they all imply that the mechanisms involved should be stronger in developing countries. Rodrik (2008) explicitly analyzed and found evidence that the RER-growth relationship is more prevalent in developing countries. We show that his finding is very sensitive to the criterion used to divide the sample between developed and developing countries. We then use alternative classification criteria and empirical strategies to evaluate the existence of asymmetries between groups of countries and find that the effect of currency undervaluation on growth is indeed larger and more robust for developing economies. However, the relationship between RER undervaluation and per capita GDP is non-monotonic.

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

“…Rodrik (2008) finds that overvaluation hurts growth and undervaluation favors growth and no significant difference in terms of the size of each effect. Rapetti et al (2012) find similar results to Rodrik's, although the effect of overvaluation is slightly higher in absolute terms than that of undervaluation. Bereau et al (2012) use panel non-linear techniques -i.e., a Panel Smooth Transition Regression model-to capture whether there are asymmetries between RER undervaluation and overvaluation.…”

“…Rodrik (2008) estimates the effect of undervaluation on growth in developing countries for two distinct periods (1950-79 and 1980-2004) and finds that it is significant in both with virtually identical magnitudes. Using several alternative definitions of developing countries, Rapetti et al (2012) get similar results to Rodrik's, also when dividing the sample in an alternative split for the pre-and post-globalization eras: 1950-74 and 1975-2004. Extending the analysis for a substantially longer period, Di Nino et al (2011) also find supporting evidence that the relationship is strong for developing countries and weak for advanced countries in both the pre-and post-World War II period (1861-1939 vs. 1950-2009).…”

“…He defines developing countries as those with a GDP per capita less than $6,000 and finds that the positive relationship between RER undervaluation and economic growth is stronger and more significant for developing than developed countries. Rapetti et al (2012) replicate Rodrik's work and show that if the threshold is instead selected from anywhere in the $9,000-$15,000 range, the estimated effect of RER undervaluation on growth is also large and highly significant for developed countries. To address the issue in more detail, they develop a series of alternative classification criteria and empirical strategies to evaluate the existence of asymmetries between groups of countries.…”

The Real Exchange Rate and Growth in Zimbabwe: Does the Currency Regime Matter?

“…This paper aims to find out whether (i) currency overvaluation prevailed under the multicurrency regime introduced in 2008 and (ii) the overvaluation may have contributed to the Zimbabwe's long term weak external and growth performance. Further, some recent literature (Gala and Lucinda, 2006;Rodrik, 2008;Rapetti et al, 2012) posits that undervalued real exchange rates can stimulate growth, and we examine if this is the case in Zimbabwe. The stock-flow approach to the real equilibrium exchange rate reveals that Zimbabwe experienced large currency overvaluation relative to the South African rand both in the run up to the 2008 collapse and in recent years, with negative impact on GDP growth, exports and productive employment.…”

Влияние Внешних Факторов На Развитие Рынка Консалтинговых Услуг

“…In particular, estimates show that RER undervaluation is often less (or no longer) significant in the more recent periods. In addition, it tends to be less supportive as GDPpc grows, though there might be some non-linearities (Rapetti et al, 2012). Moreover, RER undervaluation has not always been helpful in all regions.…”