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On the link between real exchange rate misalignment and growth: theory and empirical evidence

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  • Diallo, Ibrahima Amadou

Abstract

This paper analyzes the effect of real exchange rate (RER) on economic growth both theoretically and empirically. The first part builds an endogenous growth model which illustrates that an RER appreciation reduces the growth rate in the centralized and decentralized economies. Additionally, the model shows that taxes have a negative effect on growth. The second part employs the new Cross-Sectionally Augmented Distributed Lag Estimator to empirically study the impact of RER misalignment on economic growth. The results demonstrate that RER misalignment acts harmfully on growth. Thus corroborating what we found theoretically. The empirical findings also confirm the adverse effect of taxes on growth. The negative impact of RER misalignment on growth are maintained when we use alternative measurements of RER misalignment and subsamples of developed and developing countries. Finally, we discovered that very large misalignments have even greater damaging impacts on growth.

Suggested Citation

  • Diallo, Ibrahima Amadou, 2015. "On the link between real exchange rate misalignment and growth: theory and empirical evidence," MPRA Paper 68064, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68064
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    References listed on IDEAS

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    Cited by:

    1. DEGUENONVO, Cédric, 2017. "Real exchange rate misalignment in Senegal: effect on growth," MPRA Paper 84338, University Library of Munich, Germany.

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    More about this item

    Keywords

    Cross-Sectionally Augmented Distributed Lag Estimator; Heterogeneous Panels; Dynamic Optimization; Endogenous Growth Theory; Long-Run Relationships; Mean Group Estimator; Misalignment; Real Exchange Rate; Taxes;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General

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