Exchange Rate Misalignment and Growth: Old and New Econometric Evidence

Paulo Gala and Claudio Lucinda

Economia, 2006, vol. 7, issue 4, 165–187

Abstract: Several studies have tried to identify the relationship between growth and misaligned or overvalued currencies. Many works (Easterly (2001) and Fajnzylber et alii (2002)), find negative correlations between exchange rate misalignment and growth for a long list of developing countries since the seventies; the more overvalued the currency, the smaller the per capita growth rates. Even after controlling the regressions for several types of variables, the studies cannot reject the statistical significance of overvalued exchange rates in explaining growth. This paper presents new econometric evidence for the exchange rate levels and growth relation based on a panel data study for 58 developing countries from 1960 until 1999 using PPP deviation measures. Our main contribution here is to estimate growth regressions with a real exchange rate index that deals with changes in real GDP per capita levels. We use a new overvaluation index that takes into account variations in real per capita incomes, adjusting, thus, our exchange rate estimates for the so-called Balassa-Samuelson effect. By correcting traditional real exchange rate annual estimates for GDP per capita increases, we intend to control our whole series for appreciations due to productivity increases as many authors do for some specific years.

Keywords: Exchange Rate Levels; Overvaluations; Growth (search for similar items in EconPapers)
JEL-codes: F31 F4 O11 (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Related works:
Working Paper: EXCHANGE RATE MISALIGNMENT AND GROWTH: OLD AND NEW ECONOMETRIC EVIDENCE (2006)
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