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Real Exchange Rate, Effective Demand, and Economic Growth: Theory and Empirical Evidence for Developed and Developing Countries, 1960-2010

Francisco Martínez-Hernández ()
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Francisco Martínez-Hernández: Department of Economics, State University of New York New Paltz

No 1609, Working Papers from New School for Social Research, Department of Economics

Abstract: This paper seeks to assess the effects of an undervalued currency on economic growth. Based on a reformulation of Rodrik’s undervaluation index, our econometric results suggest that real exchange rate undervaluation has, to differing degrees, been able to enhance the economic growth of developed and developing countries. Nevertheless, when we disaggregate the main components of aggregate demand for different clusters of developed and developing countries using the Stock Flow Consistent approach (SFC), we find that in general, an undervalued currency has expansionary and contractionary effects in the short-run, specifically via the export sector and the level of aggregate consumption, respectively. This paper also estimates the effects of an undervalued currency on the level of investment and the trade balance.

Keywords: Undervalued Currency; Developed and Developing Countries; Effective Demand Components; Economic Growth; Panel Data Models (search for similar items in EconPapers)
JEL-codes: F50 F31 F41 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
Date: 2016-10
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http://www.economicpolicyresearch.org/econ/2016/NSSR_WP_092016.pdf First version, 2016 (application/pdf)

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