Unravelling The Nexus between Exchange Rate Undervaluation and Global Value Chain Participation

Mariz Abdou, Ibrahim Elbadawi, Patrick Plane and Chahir Zaki ()
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Mariz Abdou: Université Clermont Auvergne and Cairo University
Ibrahim Elbadawi: ERF
Patrick Plane: Université Clermont Auvergne and Ferdi
Chahir Zaki: Laboratoire d’Economie d’Orléans, University of Orléans

No 1709, Working Papers from Economic Research Forum

Abstract: The undervaluation of the real exchange rate (RER) can influence the performance of national exports and affect a country’s participation in global value chains (GVCs). Thus, using the Eora dataset for 143 countries over the period 1995-2018, we assess the impact of this policy on a country’s foreign value added (FVA) in exports which represents the value added in exports whose outputs are produced by foreign industries (backward participation) and the domestic value added (DVX) in exports, that refers to the value added that is embodied in the exports of other countries (forward linkages). Currency undervaluation displays a positive impact on these two ways of participating in GVCs. Consistent with what has been noted in a recent strand of literature, undervaluation acts as a compensatory factor for countries with weak institutions, and the impact of this undervaluation becomes more pronounced as the level of digitization in the economy increases. Our econometric results remain robust to a battery of sensitivity analysis tests.

Pages: 41
Date: 2024-08-20, Revised 2024-08-20
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