The Real Exchange Rate and Economic Growth
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.
- 2008b_bpea_rodrik.pdf text/pdf 609 KB Download File
Also Published In
- Brookings Papers on Economic Activity
More About This Work
- Academic Units
- Brookings Institution
- Published Here
- November 26, 2013
Comment on article by Woodford starting at page 420.