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Currency misalignments and growth: a new look using nonlinear panel data methods

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Abstract:

The aim of this article is to investigate the link between currency misalignments and economic growth. Relying on panel cointegration techniques, we calculate Real Exchange Rate (RER) misalignments as deviations of actual RERs from their equilibrium values for a set of advanced and emerging economies. Estimating Panel Smooth Transition Regression (PSTR) models, we show that RER misalignments have a differentiated impact on economic growth depending on their sign: whereas overvaluations negatively affect economic growth, RER undervaluations significantly enhance it. This result indicates that undervaluations may drive the exchange rate to a level that encourages exports and promotes growth.

Keywords: C23; F31; O47; PSTR models; exchange rate misalignments; growth; nonlinearity

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2011.577022

Affiliations: 1: EconomiX-CNRS, University of Paris Ouest, 200 Avenue de la République92001 Nanterre Cedex, France 2: CEPN-CNRS, University of Paris 13, Villetaneuse, France

Publication date: September 1, 2012

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