Desperately seeking the positive impact of undervaluation on growth

Abstract EN

This paper contributes to a current and intense debate among economists on whether real exchange rate undervaluation can boost growth.

It focuses on addressing econometric and empirical issues that casts doubt about the validity of such positive impact.

It also allows for the possibilities that the effect of undervaluation on growth operates with delay or dependence on the persistence or the level of undervaluation.

We didn’t find any convincing support to the claim that a depreciated equilibrium real exchange rate promotes economic growth.

We argue that the contrast between our results and the documented examples of a successful adoption of undervaluation strategy reported in the literature reveals that undervaluation alone is not enough to boost growth.

The simultaneous adoption of companion policies may be behind the claimed success.