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The role of exchange rate undervaluations on the inflation-growth nexus

Florian Morvillier

No 2018-15, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: The link between exchange rate undervaluations and growth has been an important source of concern over the past years, but the role of undervaluations on the inflation-growth nexus has not been yet studied. We fill up this gap by showing to what extent undervaluation's level change the effect of inflation on growth. Our analysis is based on a sample of 62 countries over the period 1980-2015. In a first time, we rely on the Bayesian Model Averaging (BMA) methodology to select the relevant growth determinants. Then, using the System Generalized Method of Moments (GMM), we find evidence that higher is the lagged undervaluation, higher is the negative effect of inflation on growth. This result is robust to the exclusion of currency crises episodes.

Keywords: Exchange rate undervaluation; Inflation; Growth; GMM (search for similar items in EconPapers)
JEL-codes: F41 O47 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2018-15

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