EXCHANGE RATE MISALIGNMENT AND GROWTH: OLD AND NEW ECONOMETRIC EVIDENCE

Several studies have tried to identify the relationship between growth and misaligned or overvalued currencies. Many works find negative correlations between exchange rate misalignment and growth for a long list of developing countries since the seventies; the more overvalued the currency, the smaller the per capita growth rates. Even after controlling the regressions for all sorts of variables, the studies cannot reject the statistical significance of overvalued exchange rates in explaining growth. This paper presents new econometric evidence for the exchange rate levels and growth relation. In line with other works in the literature, our results show a negative relationship between growth and overvaluations. The paper discusses studies that have dealt with the problem of estimating equilibrium exchange rates and its relation to growth and presents new evidence from a panel data study for 58 developing countries from 1960 until 1999 using PPP measures. We use a new overvaluation index that takes into account variations in real per capita incomes, adjusting, thus, our exchange rate estimates for the so-called Balassa-Samuelson effect