Reconciling Contrasting Views on the Growth Effect of Currency Undervaluations
Cécile Couharde
Carl Grekou
Valérie Mignon
Florian Morvillier
Highlights :
Cécile Couharde
Carl Grekou
Valérie Mignon
Florian Morvillier
- The seemingly divergent views of the Washington Consensus and the export-led growth theory on the role of currency undervaluations in promoting economic growth can be reconciled.
- Large undervaluations hurt growth in middle-income countries and come at the cost of economic slowdown in low-income economies.
- Large overvaluations are less harmful to higher-income countries’ growth compared to their lower-income counterparts.
- Moderate misalignments, whether undervaluations or overvaluations, are more likely to affect economic growth positively.
Abstract :
This paper provides an in-depth analysis of the link between exchange rate misalignments and economic growth for a large sample of 170 countries over the 1973-2019 period. We rely on new cross-country data on multilateral currency misalignments and cross-quantile regressions to demonstrate that the seemingly divergent views of the Washington Consensus and the export-led growth theory on the role of currency undervaluations in promoting economic growth can be reconciled. Although any significant departures from the equilibrium exchange rate levels are found undesirable, we show that undervaluations are more likely to stimulate economic growth in developing countries. However, this positive impact is observed only up to certain thresholds of development level and currency undervaluation. Consequently, strategies in the poorest countries that systematically undervalue currencies in real terms to foster growth should be carefully tailored, as they raise the risk for these economies of switching from a positive to a less favorable growth regime, depending on both their specific wealth level and the extent of their currency undervaluation.
Keywords : Cross-quantile Regressions | Economic Growth | Multilateral Currency Misalignments | Undervaluations
JEL : F31, O47, C32
Back