Real Exchange Rates and Growth Surges

Darryl McLeod () and Elitza Mileva ()

Fordham Economics Discussion Paper Series from Fordham University, Department of Economics

Abstract: Maintaining a weak real exchange rate is a widely recommended growth strategy, in part because of the success of Asian exporters, most recently China. Simulations of a simple two-sector open economy growth model based on Matsuyama (1992) suggest that a weaker real exchange rate can lead to a "growth surge", as workers move into traded goods industries with more "learning by doing" and exit non-traded goods sectors with slower productivity growth. Using the updated total factor productivity (TFP) estimates from Bosworth and Collins (2003) we test this model in a panel of 58 countries. We find the anticipated non-linear relationship between the real exchange rate and TFP growth: beyond a certain point real currency depreciation reduces TFP and GDP growth. Manufacturing exports appear to be one channel via which the real exchange rate affects TFP growth. Fears that a weaker real exchange rate might reduce investment and therefore productivity growth by making imported equipment more expensive are not supported by our estimates.

Keywords: Economic growth; total factor productivity growth; exchange rate policy (search for similar items in EconPapers)
JEL-codes: O14 O41 O47 O57 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-dev, nep-fdg, nep-opm and nep-sea
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:frd:wpaper:dp2011-04

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