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Real exchange rate effect on economic growth: comparison of fundamental equilibrium exchange rate and Balassa–Samuelson based Rodrik approach

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  • Mehdi Seraj
  • Cagay Coskuner

Abstract

This study reproduces the work of Dani Rodrik on real exchange rate undervaluation and economic growth for 93 countries over the period 1990–2018. While the empirical literature on the dynamics between the real exchange rate11It is a measure of the bilateral real exchange rate with respect to the US dollar. and economic growth is relatively comprehensive, little has been done to compare these dynamics within economies using the Balassa–Samuelson-based Rodrik approach (BS) and the fundamental equilibrium exchange rate model (FEER). This research, to the best of the authors’ knowledge, is one of the first to compare the fundamental equilibrium exchange rate model and Balassa–Samuelson-based Rodrik approach and use dynamic estimation on the Rodrik approach. The findings of the study support Rodrik’s conclusion that undervaluation has a significant impact on economic growth, although the results of FEER are more significant than those of BS. Furthermore, the first lag of undervaluation has a significant effect on economic growth.

Suggested Citation

  • Mehdi Seraj & Cagay Coskuner, 2021. "Real exchange rate effect on economic growth: comparison of fundamental equilibrium exchange rate and Balassa–Samuelson based Rodrik approach," Journal of Applied Economics, Taylor & Francis Journals, vol. 24(1), pages 541-554, January.
    • Handle: RePEc:taf:recsxx:v:24:y:2021:i:1:p:541-554
    DOI: 10.1080/15140326.2021.1977083
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    Cited by:

    1. 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.

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