Exchange Rates and the Speed of Economic Recovery: The Role of Financial Development

Boris Fisera

No 2022/18, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: We study the influence of the exchange rate on the speed of economic recovery in a sample of 67 developed and developing economies over the years 1989-2019. First, using a cross-sectional sample of 341 economic recoveries, we study the effect of nominal depreciation and real undervaluation on the length of economic recovery. Our findings indicate that both nominal depreciation and real undervaluation increase the speed of economic recovery. However, this finding only holds for smaller depreciations/ undervaluations. Second, we use an interacted panel VAR (IPVAR) model to investigate the effect of real undervaluation on the speed of economic recovery after external shock. While we once again find evidence that undervalued domestic currency increases the speed of economic recovery, its positive effect seems limited in size. Furthermore, we also explore the role of financial development in influencing the effectiveness of undervalued domestic currency in stimulating the economic recovery. We find that the higher level of financial development seems to limit the negative effect of an overvalued currency on the speed of economic recovery, but not to influence the effect of an undervalued currency on economic recovery.

Keywords: Economic recovery; exchange rate; currency depreciation; real undervaluation; financial development; interacted panel VAR (IPVAR) (search for similar items in EconPapers)
Pages: 52 pages
Date: 2022-08, Revised 2022-08
New Economics Papers: this item is included in nep-fdg, nep-mon and nep-opm
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ies.fsv.cuni.cz/en/veda-vyzkum/working-papers/6649 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fau:wpaper:wp2022_18

Access Statistics for this paper

More papers in Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies Contact information at EDIRC.
Bibliographic data for series maintained by Natalie Svarcova ().