The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back?

By Andrew Berg, Yanliang Miao. Social Science Research Network, 2010

190 citations recorded by the source corpus.

There is good reason and much evidence to suggest that the real exchange rate matters for economic growth, but why? The "Washington Consensus" (WC) view holds that real exchange rate misalignment implies macroeconomic imbalances that are themselves bad for growth. In contrast, Rodrik (2008) argues that undervaluation relative to purchasing power parity is good for growth because it promotes the otherwise inefficiently small tradable sector. Our main result is that WC and the Rodrik views of the role of misalignment in growth are observationally equivalent for the main growth regressions he reports. There is an identification problem: Determinants of misalignment are also likely to be independent drivers of growth, and these types of growth regressions are hard-pressed to disentangle the different channels. However, we confirm that not only are overvaluations bad but undervaluations are also good for growth, a result squarely consistent with the Rodrik story but one that requires some gymnastics from the WC viewpoint.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/bfc27cabd7dfb42f0f40e1a1fda7230e8eab1d9c

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Citations in the corpus

When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth (2013, background): “Berg and Miao (2010) analyze Rodrik (2008) and find an identification problem, since determinants of misalignment are also determinants of growth.”
A Panel Data Investigation of Real Exchange Rate Misalignment and Growth (2012, unknown): “…the literature on real exchange rate misalignment is the notion that overvaluation processes that last for a 1 See Rodrik (2008), Eichengreen (2008), Berg and Miao (2010), Gala and Lucinda (2006), and Aghion et al. (2006) for recent panel data studies on real exchange rate misalignment and growth.”
The Influence of Firm Global Supply Chains and Foreign Currency Undervaluations on US Trade Disputes (2015, background): “On the link between the exchange rate and growth, see Berg and Miao 2010; Easterly 2005; and Rodrik 2008.”
The relationship between exchange rates and international trade: a literature review (2013, background): “As Berg and Miao (2010) point out, in this view any real exchange rate misalignment implies some sort of macroeconomic disequilibrium, which in itself is bad for economic growth.”