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Revisiting the real exchange rate misalignment-economic growth nexus via the across-sector misallocation channel

Claire Giordano ()

No 1385, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Real effective exchange rate (REER) imbalances may affect economic growth by altering the allocation of labour and capital across sectors. This study assesses whether the component of inter-sectoral production factor misallocation induced by REER misalignments significantly hinders economic development and if this is the only channel via which REER imbalances operate. REER misalignments are derived from a Behavioural Equilibrium Exchange Rate model; labour misallocation and capital misallocation are measured, according to two alternative indicators, on a unique cross-country cross-sector national account dataset of 54 economies and 12 sectors over the years 1980-2015. Both REER over- and undervaluations lead to increased across-sector labour (but not capital) misallocation and, uniquely via this channel, they significantly hamper real growth. The correction of these external imbalances would thus stimulate inter-sectoral allocative efficiency and, ultimately, economic activity.

Keywords: external imbalances; real effective exchange rate misalignments; labour misallocation; capital misallocation; economic development (search for similar items in EconPapers)
JEL-codes: F40 F43 O11 O14 O19 (search for similar items in EconPapers)
Date: 2022-10
New Economics Papers: this item is included in nep-fdg and nep-opm
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