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Long-run effects of exchange rate appreciation: Another puzzle?

Marlene Amstad and Beatrice Weder di Mauro

Aussenwirtschaft, 2017, vol. 68, issue 01, 63-82

Abstract: In the short to medium run, open economy textbook models predict that a real exchange rate appreciation shock negatively impacts macroeconomic performance. Over the long run, exchange rate appreciation and economic growth are predicted to be positively associated due to Balassa-Samuelson effects. In this case, the causality runs from growth to appreciation and exchange rate changes merely reflect underlying economic development, they are not driving them. This paper starts with a selective review of recent empirical literature, which is more ambivalent and suggests several reasons as to why the sensitivity to exchange rate appreciation shocks seems lower than predicted by theory. Reviewing the long-run association of appreciation and growth suggests that causality may also be at issue and raises another puzzle, particularly pronounced in Switzerland.

Date: 2017-12
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Handle: RePEc:usg:auswrt:2017:68:01:63-82