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Long-run effects of exchange rate appreciation: Another puzzle?

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  • Marlene Amstad
  • Beatrice Weder di Mauro

Abstract

In the short to medium run, open economy textbook models predict that a real exchange rate appreciation shock negatively impacts macroeconomic performance. Over the long run, exchange rate appreciation and economic growth are predicted to be positively associated due to Balassa-Samuelson effects. In this case, the causality runs from growth to appreciation and exchange rate changes merely reflect underlying economic development, they are not driving them. This paper starts with a selective review of recent empirical literature, which is more ambivalent and suggests several reasons as to why the sensitivity to exchange rate appreciation shocks seems lower than predicted by theory. Reviewing the long-run association of appreciation and growth suggests that causality may also be at issue and raises another puzzle, particularly pronounced in Switzerland.

Suggested Citation

  • Marlene Amstad & Beatrice Weder di Mauro, 2017. "Long-run effects of exchange rate appreciation: Another puzzle?," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 68(01), pages 63-82, December.
    • Handle: RePEc:usg:auswrt:2017:68:01:63-82
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    References listed on IDEAS

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    Cited by:

    1. Freitag, Andreas & Lein, Sarah M., 2023. "Endogenous product adjustment and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 140(C).

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