Currency Misalignments and Economic Growth: The Foreign Currency-Denominated Debt Channel

Carl Grekou

Working Papers from CEPII research center

Abstract: The literature on the growth effects of currency misalignments, although prolifi c, revolves around two main axes: the export-oriented growth literature which attributes positive effects to undervaluations (competitiveness gains) and the Washington Consensus view according to which any deviations from equilibrium hamper economic growth. In this paper, relying on a panel of 70 developing and emerging countries, we evidence the existence of a foreign currencydenominated debt channel through which misalignments impact growth. Compared to the traditional competitiveness channel, this channel works in the opposite direction. In particular, we show that, unlike overvaluations, undervaluations are more likely to cause valuation effects that tend to dampen the competitiveness effect. The paper therefore reconciles the two strands of the literature: undervaluations may have indeed a positive growth effect, but it is crucial to take into account the possible costs related to these undervaluations to have a clearer picture of the net total effect.

Keywords: Equilibrium Exchange Rate; Currency Misalignments; Debt; Valuation Effects; Economic Growth (search for similar items in EconPapers)
JEL-codes: C33 F30 F43 O11 (search for similar items in EconPapers)
Date: 2018-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Currency misalignments and economic growth: the foreign currency-denominated debt channel (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepidt:2018-12

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