ARTICLE
TITLE

Going under to stay on top: How much real exchange rate undervaluation is needed to boost growth in developing countries

SUMMARY

This paper explores the real exchange rate (RER)-economic growth relationshipfor a wide sample of countries over the period 1960-2009. After removing influentialobservations, the system-GMM estimates suggest a positive link between anundervalued RER and growth in non-industrial countries, particularly in thosewith upper-middle and high income levels. In turn, RER volatility is found harmfulfor growth. These results holds when testing for asymmetric effects of RERmisalignment: a real undervaluation boosts growth in non-industrial countries,while overvaluation seems to have no effects at any income level. Besides, themagnitude of the misalignment is also relevant: an undervalued RER of about26% on average has a positive impact on growth.

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