The real exchange rate and economic growth: are developing countries di¤erent? Working Paper 2011-07

Recent research has found a positive relationship between real exchange rate (RER) under-valuation and economic growth. Different rationales for this association have been offered, but they all imply that the mechanisms involved should be stronger in developing countries. Rodrik (2008) explicitly analyzed and found evidence that the RER-growth relationship is more preva-lent in developing countries. We show that his finding is very sensitive to the criterion used to divide the sample between developed and developing countries. We then use alternative classifi-cation criteria and empirical strategies to evaluate the existence of asymmetries between groups of countries and find that the effect of currency undervaluation on growth is indeed larger and more robust for developing economies. However, the relationship between RER undervaluation and per capita GDP is non-monotonic. 1