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Currency undervaluation and growth: Is there a productivity channel?

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  • Samba Mbaye

Abstract

Undervaluation of the currency is generally believed to affect growth through two main transmission channels: the “capital accumulation channel” and the “total factor productivity (TFP) growth channel”. This paper carries out the first empirical investigation on the TFP growth channel. More specifically, we provide answers to the three following questions: does undervaluation of the currency boost the overall productivity level in the economy? If so, does this “undervaluation-induced” productivity improvement significantly enhance growth? And finally, what is the magnitude of the TFP growth channel compared to the capital accumulation channel? The analysis is conducted on a panel of 72 countries over 1970–2008. The results give strong support to the TFP growth channel: a 10% increase in undervaluation enhances growth on average by 0.14% via an improvement in productivity. Most interestingly, our estimates suggest that this channel conveys the most important part of the growth-enhancing effect of undervaluation. The model has been subject to various robustness checks to support these findings.

Suggested Citation

  • Samba Mbaye, 2013. "Currency undervaluation and growth: Is there a productivity channel?," International Economics, CEPII research center, issue 133, pages 8-28.
    • Handle: RePEc:cii:cepiie:2013-q1-133-2
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    Cited by:

    1. Abdullahil Mamun & Harun Bal & Shahanara Basher & Md Mahi Uddin & Nazamul Hoque, 2023. "Growth Effects Of Currency Misalignment And Capital Flight In Turkey," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 26(2), pages 221-250, May.
    2. Prabheesh, K.P. & Prakash, Branesh & Vuniivi, Viliame, 2023. "Assessment of Fiji’s exchange rate," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1282-1305.
    3. Florian Morvillier, 2019. "Do currency undervaluations affect the impact of inflation on growth?," Post-Print hal-02138677, HAL.
    4. Gabriel Porcile & Giuliano Toshiro Yajima, 2019. "New Structuralism and the balance-ofpayments constraint," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(4), pages 517-536, October.
    5. Ramos-Herrera, María del Carmen & Sosvilla-Rivero, Simón, 2023. "Economic growth and deviations from the equilibrium exchange rate," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 764-786.
    6. Cécile Couharde & Carl Grekou & Valérie Mignon & Florian Morvillier, 2024. "Reconciling contrasting views on the growth effect of currency undervaluations," Working Papers hal-04568924, HAL.
    7. Sabrine Ferjani & Sami Saafi & Ridha Nouira & Christophe Rault, 2022. "The Impacts of the Dollar-Renminbi Exchange Rate Misalignment on the China-United States Commodity Trade: An Asymmetric Analysis," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(3), pages 507-554, September.
    8. Daren Conrad & Jaymieon Jagessar, 2018. "Real Exchange Rate Misalignment and Economic Growth: The Case of Trinidad and Tobago," Economies, MDPI, vol. 6(4), pages 1-23, September.
    9. Hussaini Umaru & Aguda Niyi A. & Nordiana Osagie Davies, 2018. "The Effects of Exchange Rate Volatility on Economic Growth of West African English-Speaking Countries," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(4), pages 131-143, October.
    10. Hugo Iasco-Pereira & Fabricio José Missio, 2022. "Would a competitive real exchange rate be a driver of economic prosperity?," PSL Quarterly Review, Economia civile, vol. 75(303), pages 355-383.
    11. Kirsi Zongo & Mahamadou Diarra, 2022. "Exchange Rate Misalignments, Foreign Direct Investment and Industrial Performance in Sub-Saharan Africa [Désalignements du taux de change, investissements directs étrangers et performances industri," Working Papers hal-03649887, HAL.
    12. Samba Mbaye, 2012. "Beggar-thy-Neighbor Effects of Currency Undervaluation: Is China the Tip of the Iceberg?," Working Papers halshs-00761380, HAL.
    13. n.a.m, Naseem & m.s, Hamizah, 2013. "Exchange Rate Misalignment and Economic Growth: Recent Evidence in Malaysia," MPRA Paper 52447, University Library of Munich, Germany.
    14. KAFANDO, Namalguebzanga, 2014. "L'industrialisation de l'Afrique: l'importance des facteurs structurels et du régime de change [The industrialization of Africa: the importance of structural factors and exchange rate regime]," MPRA Paper 68736, University Library of Munich, Germany.
    15. Morvillier, Florian, 2020. "Do currency undervaluations affect the impact of inflation on growth?," Economic Modelling, Elsevier, vol. 84(C), pages 275-292.
    16. Nagayasu, Jun, 2015. "Global and country-specific factors in real effective exchange rates," MPRA Paper 64217, University Library of Munich, Germany.
    17. Florian Morvillier, 2018. "The role of exchange rate undervaluations on the inflation-growth nexus," EconomiX Working Papers 2018-15, University of Paris Nanterre, EconomiX.
    18. John Bosco Nnyanzi & John Bosco Oryema & Nicholas Kilimani, 2022. "Real exchange rate undervaluation, regional integration and services sector performance: evidence from the East African Community," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-23, December.
    19. Samba Mbaye, 2012. "Beggar-thy-Neighbor Effects of Currency Undervaluation: Is China the Tip of the Iceberg?," CERDI Working papers halshs-00761380, HAL.
    20. Nagayasu, Jun, 2016. "Commonality and Heterogeneity in Real Effective Exchange Rates: Evidence from Advanced and Developing Countries," MPRA Paper 70078, University Library of Munich, Germany.
    21. Florian Morvillier, 2018. "The role of exchange rate undervaluations on the inflation-growth nexus," Working Papers hal-04141804, HAL.

    More about this item

    Keywords

    Real exchange rate; Currency; Misalignment; Undervaluation; Growth; Productivity; China;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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