Academic Commons

Articles

The Real Exchange Rate and Economic Growth

Rodrik, Dani; Woodford, Michael

I show that undervaluation of the currency (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries. This finding is robust to using different measures of the real exchange rate and different estimation techniques. I also provide some evidence that the operative channel is the size of the tradable sector (especially industry). These results suggest that tradables suffer disproportionately from the government or market failures that keep poor countries from converging toward countries with higher incomes. I present two categories of explanations for why this may be so, the first focusing on institutional weaknesses, and the second on product-market failures. A formal model elucidates the linkages between the real exchange rate and the rate of economic growth.

Subjects

Files

Also Published In

Title
Brookings Papers on Economic Activity

More About This Work

Academic Units
Economics
Publisher
Brookings Institution
Published Here
November 26, 2013

Notes

Comment on article by Woodford starting at page 420.