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Exchange Rate Misalignments, Growth, and Institutions

Author

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  • Jaromir Baxa

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Information Theory and Automation, Czech Academy of Sciences, Prague, Czech Republic)

  • Michal Paulus

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)

Abstract

In this paper, we revisit the relationship between economic growth and exchange rate misalignments, especially undervaluations. In particular, we ask which countries benefit from undervaluations at most, and whether the impact of undervaluations on growth depends on institutional quality as suggested in previous literature. First, we separate countries into groups according to their institutional quality using the cluster analysis. Then, we estimate the relationship between growth and exchange rate misalignment while allowing for variation in coefficients across these clusters. Our results confirm the positive relationship between undervaluation and growth, and this relationship is the highest for countries with the highest quality of institutions rather than with a poor level of institutional quality. Therefore, our results reconcile the importance of good institutions and do not support the hopes that the countries can compensate for the poor institutional quality via undervaluation of currencies successfully.

Suggested Citation

  • Jaromir Baxa & Michal Paulus, 2020. "Exchange Rate Misalignments, Growth, and Institutions," Working Papers IES 2020/27, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2020.
    • Handle: RePEc:fau:wpaper:wp2020_27
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    File URL: https://ies.fsv.cuni.cz/en/veda-vyzkum/working-papers/6274
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    Cited by:

    1. Abdul Jalil, 2021. "Exchange Rate Policy Must Seek Undervaluation!," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 60(1), pages 85-91.

    More about this item

    Keywords

    exchange rate misalignments; undervaluation; economic growth; institutions; corruption;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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