The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back?

March 1, 2010

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Andrew Berg, and Yanliang Miao. The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back?, (USA: International Monetary Fund, 2010) accessed November 12, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

There is good reason and much evidence to suggest that the real exchange rate matters for economic growth, but why? The "Washington Consensus" (WC) view holds that real exchange rate misalignment implies macroeconomic imbalances that are themselves bad for growth. In contrast, Rodrik (2008) argues that undervaluation relative to purchasing power parity is good for growth because it promotes the otherwise inefficiently small tradable sector. Our main result is that WC and the Rodrik views of the role of misalignment in growth are observationally equivalent for the main growth regressions he reports. There is an identification problem: Determinants of misalignment are also likely to be independent drivers of growth, and these types of growth regressions are hard-pressed to disentangle the different channels. However, we confirm that not only are overvaluations bad but undervaluations are also good for growth, a result squarely consistent with the Rodrik story but one that requires some gymnastics from the WC viewpoint.

Subject: Exchange rates, Government consumption, Purchasing power parity, Real exchange rates, Terms of trade

Keywords: Dependent variable, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/058
Stock No:

WPIEA2010058
ISBN:

9781451963755
ISSN:

1018-5941

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