Real Exchange Rate, Effective Demand, and Economic Growth

October 9, 2016

This paper seeks to assess the effects of an undervalued currency on economic growth.

Based on a reformulation of Rodrik’s undervaluation index, our econometric results suggest that real exchange rate undervaluation has, to differing degrees, been able to enhance the economic growth of developed and developing countries. Nevertheless, when we disaggregate the main components of aggregate demand for different clusters of developed and developing countries using the Stock Flow Consistent approach (SFC), we find that in general, an undervalued currency has expansionary and contractionary effects in the short-run, specifically via the export sector and the level of aggregate consumption, respectively.

Author: Francisco A. Martínez-Hernández
Download PDF