Manufacturing and the real exchange rate: natural resource rents matter when measuring misalignments

Mohamed Chaffai and Patrick Plane

Applied Economics, 2025, vol. 57, issue 44, 7039-7059

Abstract: We analyse the relationship between the share of manufacturing in GDP and real exchange rate misalignments based on the purchasing power parity criterion (PPP) and a sample of 102 developing and transition economies (2003–2019). In a departure from usual practice, we subtract natural resource rents from GDP in order to correct misalignments for the productivity bias. A dynamic threshold panel model is used and we separate out the impact of undervaluation and overvaluation components in the same regression. Overvaluation has a negative linear effect, while undervaluation stimulates the manufacturing sector in a non-linear way. Above an 18% threshold, the marginal effect of undervaluation diminishes.

Date: 2025
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DOI: 10.1080/00036846.2024.2387859

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