Cheaper currencies and long‐term growth: The effect of exchange rate management and capital controls

Phornchanok Cumperayot and Roy Kouwenberg

The World Economy, 2021, vol. 44, issue 9, 2738-2757

Abstract: In this paper, we test whether weakening the domestic currency can help boost economic growth. To estimate this policy‐relevant but yet complex link, we apply a new mediation analysis to isolate the long‐term growth effects of currency undervaluation induced by active exchange rate management and capital control policies. Using a dataset of 182 countries in the post‐Bretton‐Woods period, we find that changes in undervaluation driven by exchange rate management and capital control policies have no significant impact on long‐term growth. In addition, the direct growth effects of these policies are typically negative and offset the small positive impact gained indirectly through increased currency undervaluation.

Date: 2021
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