Does real exchange rate undervaluation really promote economic growth?

Rafael Ribeiro (), John McCombie and Gilberto Lima

No 574, Textos para Discussão Cedeplar-UFMG from Cedeplar, Universidade Federal de Minas Gerais

Abstract: This article seeks to reassess the empirical literature on real exchange rate misalignment and growth in light of the extensive discussion about the relationship between income distribution and growth in developing economies. We state that the relationship between changes in the real exchange rate and growth can be characterised by two conflicting partial effects, as follows: i) undervaluation stimulates technological change and knowledge spillovers, thus affecting positively output growth; ii) undervaluation raises income inequality and hence harms output growth. Though there are a vast number of empirical studies presenting robust evidence of a positive relationship between currency undervaluation and growth for developing economies, none has yet explicitly considered the potentially negative distributional effects of undervaluation on growth. Our empirical model adds to this literature by suggesting that, once both functional income distribution and the level of technological capabilities are explicitly taken into account, the direct impact of real exchange rate misalignment on growth becomes statistically non-significant for a sample of developing countries. Further, based on our results, we state that the real exchange rate only affects growth indirectly through its impacts on functional income distribution and technological innovation. Our estimates have shown that the indirect impact of undervaluation on growth in developing countries is negatively signed.

Keywords: Exchange rate; growth; income distribution; technological capabilities (search for similar items in EconPapers)
JEL-codes: D63 F31 F43 O33 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2018-01
New Economics Papers: this item is included in nep-cse
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Does real exchange rate undervaluation really promote economic growth? (2020)
Working Paper: Does Real Exchange Rate Undervaluation Really Promote Economic Growth? (2017)
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