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Real Exchange Rates and Growth

Duygu Yolcu Karadam () and Erdal Özmen ()
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Duygu Yolcu Karadam: Department of Economics, Pamukkale University
Erdal Özmen: Department of Economics, METU

No 1609, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: This paper empirically investigates the impact of real exchange rates (RER) on growth of a large number of advanced (AE) and developing economies (DE) by employing the recent non-stationary panel data estimation procedures to estimate conventional growth models augmented with global financial and monetary conditions variables. Our results suggest that, the expansionary depreciation findings for DE are often based on a misinterpretation of an error correction mechanism coefficient. We find that external variables representing global financial and monetary conditions are strongly significant in explaining growth in DE along with the conventional variables including trade openness, human capital, domestic savings. Our data support the view that RER depreciations are contractionary for DE with high external debt and expansionary for AE. Higher trade openness enhances the contractionary impact of RER depreciations in both AE and DE. These results are found to be robust for different RER and per capita real income measures.

Keywords: Balance Sheets; Developing economies; Exchange rates; Growth (search for similar items in EconPapers)
JEL-codes: F30 F41 F60 F65 O11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-opm and nep-sog
Date: 2016-09, Revised 2016-09
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http://erc.metu.edu.tr/en/system/files/menu/series16/1609.pdf First version, 2016 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:met:wpaper:1609

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