How do currency misalignments’ threshold affect economic growth?

Cécile Couharde () and Audrey Sallenave

Journal of Macroeconomics, 2013, vol. 36, issue C, 106-120

Abstract: Based on panel smooth transition regressions, this paper determines for a large sample of developed and emerging countries, the value of currency misalignments from which we observe a regime shift in economic growth, over the 1980–2009 period. Misalignments, defined as the difference between the current real exchange rate and its equilibrium counterpart, are derived from the behavioural equilibrium exchange rate (BEER) approach. Our estimate relies on recent panel cointegration techniques that allow for heterogeneity and cross-sectional dependencies. We also control for the presence of structural breaks. Our findings show that our misalignments index plays a key role in the reversal of trend growth. Although the undervaluation of their currency acts positively on their growth, emerging countries cannot base their strategy on this finding to promote growth. We relate this result to the adverse effects of depreciation, as in “original sin”. The implications of our findings, in terms of economic policy, clearly emphasise the economic leverage role of undervaluation: it remains a powerful cyclical instrument but has to be, nevertheless, employed with precautionary to be globally and internationally consistent.

Keywords: Growth; Exchange rate misalignments; Nonlinearity; PSTR models; Structural breaks (search for similar items in EconPapers)
JEL-codes: C23 F31 O47 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Related works:
Working Paper: How do currency misalignments' threshold affect economic growth? (2013)
Working Paper: How do currency misalignments’ threshold affect economic growth? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:36:y:2013:i:c:p:106-120

DOI: 10.1016/j.jmacro.2012.11.002

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