Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?

Samba Mbaye ()

No 201211, Working Papers from CERDI

Abstract: 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.

Keywords: Growth; Real exchange rate; Misalignment; Undervaluation; Productivity (search for similar items in EconPapers)
JEL-codes: F31 O47 (search for similar items in EconPapers)
Pages: 26
Date: 2012
New Economics Papers: this item is included in nep-eff and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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