Exchange Rate Misalignment and Economic Growth

This paper explores how exchange rate misalignment may impact economic growth and development. Using PDOLS estimation to arrive at a measure of misalignment and employing standard growth regressions, a number of interesting results emerge. This paper finds that exchange rate misalignment has asymmetric effects. Specifically, overvaluation significantly hurts growth while undervaluation has the opposite effect (though statistically insignificant). Misalignment affects developed and developing countries differently in that developing countries are more sensitive to the growth effects of misalignment. Finally, the persistence of misalignment matters. Continuing misalignment of either variety are harmful for growth. This suggests that it is not a viable strategy for a country to intentionally undervalue a currency with the aim of improving the competitiveness of the export sector. In the end, it seems clear that a country needs to limit misalignment and maintain an exchange rate that is closely in line with the equilibrium rate