Research Article
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Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?

Year 2021, Volume: 21 Issue: 2, 111 - 123, 31.03.2021
https://doi.org/10.21121/eab.907399

Abstract

This study investigates the impact of real exchange rates (RER) on growth of a large number of advanced (AE) and developing economies (DE) estimating conventional growth models augmented with global financial conditions variables. First of all, replicating Rodrik (2008) and following studies employing panel autoregressive distributed lag (PARDL) and PARDL mean group (PARDL-MG) models, we show that the expansionary depreciation findings for DE are often based on a misinterpretation of an error correction mechanism coefficient. Then, we investigate the relationship between RER and growth explicitly taking into account balance sheet or external debt vulnerabilities which often do not considered by conventional growth literature. Fully-Modified OLS estimation results show that, the external variables demonstrating global financial and monetary conditions are strongly significant in explaining growth in DE along with the conventional domestic variables including trade openness, human capital and savings. Furthermore, our results suggest that, RER depreciations are contractionary for DE with high external debt and expansionary for AE. However, higher trade openness decreases the contractionary impact of depreciations in both AE and DE. These results are robust for different RER and real income measures.

References

  • Ahmed, S., Gust, C., Kamin, S. & Huntley, J. (2002). Are depreciations as contractionary as devaluations? A comparison of selected emerging and industrial economies. FRB International Finance Discussion Paper No. 737.
  • Ahmed, S., Appendino, M. & Ruta, M. (2015). Depreciations without exports? Global value chains and the exchange rate elasticity of exports. World Bank Policy Research Working Paper No. 7390.
  • Aizenman, J., Chinn, M. & Ito, H. (2015). Monetary policy spillovers and the trilemma in the new normal: periphery country sensitivity to core country conditions. NBER Working Paper 21128.
  • Almansour, A., Aslam, A., Bluedorn, J. & Duttagupta, R. (2015). How vulnerable are emerging markets to external shocks? Journal of Policy Modeling, 37(3), 460-483.
  • Alper, A. M. & Civcir, I. (2012). Can overvaluation prelude to crisis and harm growth in Turkey? Journal of Policy Modeling, 34(1), 112–131.
  • Bahadir, B. & Lastrapes, W. D. (2015). Emerging market economies and the world interest rate. Journal of International Money and Finance, 58, 1–28.
  • Baldwin, R. & Lopez-Gonzalez, J. (2015). Supply-chain trade: a portrait of global patterns and several testable hypotheses. The World Economy, 38(11),1682-1721.
  • Barro, R. J. (2015). Convergence and modernisation. The Economic Journal, 125, 911-942.
  • Bebczuk, R., Galindo, A. & Panizza, U. (2006). An evaluation of the contractionary devaluation hypothesis. Inter-American Development Bank Working Paper No. 582.
  • Bordo, M. D., Meissner, C. M. & Stuckler, D. (2010). Foreign currency debt, financial crises and economic growth: A long-run view. Journal of International Money and Finance, 29(4), 642–665.
  • Bussiere, M., Lopez, C. & Tille, C. (2015). Do real exchange rate appreciations matter for growth? Economic Policy, January, 1–41.
  • Calderón, C. & Fuentes, J. R. (2012). Removing the constraints for growth: Some guidelines. Journal of Policy Modeling, 34(6), 948–970.
  • Calvo, G. A., Leiderman L. & Reinhart, C.M. (1993). Capital inflows and real exchange rate appreciation in Latin America -The role of external factors. IMF Staff Papers, 40(1), 108-51.
  • Calvo, G.A. & Reinhart, C. (2002). Fear of floating. The Quarterly Journal of Economics, 117(2), 379-408.
  • Calvo, G.A., Izquierdo A. & Mejía, L.F. (2004). On the empirics of sudden stops: the relevance of balance sheet effects. NBER Working Paper No. 11492.
  • Catão, L.A.V. & Milesi-Ferretti, G.M. (2014). External liabilities and crises. Journal of International Economics, 94(1), 18-32.
  • Céspedes, L.F. (2005). Financial frictions and real devaluations. Central Bank of Chile Working Papers No. 318.
  • Cespedes, L.F., Chang, R. & Velasco, A. (2003). IS-LM-BP in the pampas. IMF Staff Papers, 50(1), 143–156.
  • Chudik, A. & Pesaran, M. H. (2015). Large panel data models with cross-sectional dependence: a survey. In The Oxford Handbook of Panel Data (B. H. Baltagi, Ed.). 3–45. Oxford University Press, New York.
  • Cline, W.R. (2015). Further statistical debate on “too much finance”. Peterson Institute for International Economics WP 15 - 16.
  • Dell’Erba, S., Hausmann, R. & Panizza, U. (2013). Debt levels, debt composition, and sovereign spreads in emerging and advanced economies. Oxford Review of Economic Policy, 29(3), 518–547.
  • Diaz Alejandro, C. (1965). Exchange rate devaluation in a semi-industrialized country. MIT Press, Cambridge, United States.
  • Di Nino, V., Eichengreen, B. & Sbracia, M. (2011). Real exchange rates, trade, and growth: Italy 1861-201. Bank of Italy Working Paper No: 10.
  • Eberhardt, M. & Teal, F. (2011). Econometrics for grumblers: a new look at the literature on cross-country growth empirics. Journal of Economic Surveys, 25(1), 109–155
  • Eichengreen B. (2008). The real exchange rate and economic growth. World Bank Growth Commission Working Paper No. 4.
  • Eichengreen, B., Hausmann, R., & Panizza, U. (2003). Currency mismatches, debt intolerance and original sin: why they are not the same, why it matters. NBER Working Paper No. 10036.
  • Erdem, F. P. & Özmen, E. (2015). Exchange rate regimes and business cycles: an empirical investigation. Open Economies Review, 26(5), 1041-1058.
  • Feenstra, R. C., Inklaar, R. & Timmer, M. P. (2015). The next generation of the Penn World Table. American Economic Review, 105(10), 3150-3182.
  • Frankel, J.A. (2005). Mundell-Fleming lecture: contractionary currency crashes in developing countries. IMF Staff Papers, 55(2), 149-192.
  • Frankel, J.A. (2011). Monetary policy in emerging markets, in Handbook of Monetary Economics, (B. Friedman and M. Woodford, Eds.) Vol. 3B: 1439-1520 (North Holland: The Netherlands).
  • Galindo, A., Panizza, U. & Schiantarelli, F. (2003). Debt composition and balance sheet effects of currency depreciation: a summary of the micro evidence. Emerging Markets Review, 4, 330-339.
  • Gluzmann, P., Levy-Yeyati E. & Sturzenegger, F. (2012). Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited. Economic Letters, 117, 666-672.
  • Gonzalez-Rozada, M. & Levy-Yeyati, E. (2008). Global factors and emerging market spreads. The Economic Journal, 118 (533), 1917–1936.
  • Guzman, M., Ocampo J. A. & Stiglitz J. E. (2018). Real exchange rate policies for economic development. World Development, 110, 51-62.
  • Habib, M. M., Mileva, E. & Stracca, L. (2017). The real exchange rate and economic growth: Revisiting the case using external instruments. Journal of International Money and Finance, 73, 386-398.
  • IMF (2004). Global financial market developments. Global Financial Stability Report (April, Ch. 2. IMF).
  • Johnson, R.C. (2014). Five facts about value-added exports and implications for macroeconomics and trade research. Journal of Economic Perspectives, 28(2), 119–142.
  • Kesriyeli, M., Özmen, E. & Yiğit, S. (2011). Corporate sector liability dollarization and exchange rate balance sheet effect in Turkey. Applied Economics, 43(30), 4741-4747.
  • Kose, A., Otrok, C. & Prasad, E.S. (2012). Global business cycles: Convergence or decoupling? International Economic Review, 87, 178-90.
  • Krugman, P. (1999). Balance sheets, the transfer problem and financial crises. International Tax and Public Finance, 6, 459- 472.
  • Lane, P. R. & Stracca, L. (2018). Expansionary Appreciation. Economic Policy, April, 225-264.
  • Levin, A., Lin, C. F. and Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of econometrics, 108(1), 1-24.
  • Levy-Yeyati, E., Sturzenegger, F. & Gluzmann, P.A. (2013). Fear of appreciation. Journal of Development Economics, 101, 233–247.
  • Miranda-Agrippino, S. & Rey, H. (2015). World asset markets and the global financial cycle. NBER Working Paper No. 21722.
  • Montiel, P. J. & Serven, L. (2008). Real exchange rates, saving and growth: is there a link?, World Bank Policy Research Working Paper No. 4636.
  • Nouira, R. & Sekkat, K. (2012). Desperately seeking the positive impact of undervaluation on growth. Journal of Macroeconomics, 34(2), 537-552.
  • Obstfeld, M. (2004). Globalization, macroeconomic performance, and the exchange rates of emerging economies. Monetary and Economic Studies, 22(1), 29–55.
  • Obstfeld, M. (2015). Trilemmas and trade-offs: living with financial globalisation. BIS Working Papers No 480.
  • Özatay, F., Özmen, E. & Sahinbeyoglu, G. (2009). Emerging market sovereign spreads, global financial conditions and U.S. macroeconomic news. Economic Modelling, 26(2), 526–531.
  • Özmen, E. & Yaşar, Ö. D. (2016). Emerging market sovereign bond spreads, credit ratings and global financial crisis. Economic Modelling, 59: 93–101.
  • Pedroni, P. (2000). Fully-modified OLS for heterogeneous cointegrated panels. Advances in Econometrics, 15, 93–130.
  • Pedroni, P. (2004). Panel cointegration; asymptotic and finite sample properties of pooled time series tests with an application to the PPP Hypothesis. Econometric Theory, 20(3), 597–625.
  • Pedroni, P. (2007). Social capital, barriers to production and capital shares; implications for the importance of parameter heterogeneity from a nonstationary panel approach. Journal of Applied Econometrics, 22, 429-51.
  • Pesaran, M.H., Shin, Y. & Smith, R.P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94, 621–634
  • Rey, H. (2015). Dilemma not trilemma: The global financial cycle and monetary policy independence. NBER Working Paper No. 21162.
  • Rey, H. (2016). International channels of transmission of monetary policy and the Mundellian trilemma. NBER Working Paper No. 21852.
  • Rockey, J & Temple, J. (2016). Growth econometrics for agnostics and true believers. European Economic Review, 8, 86–102
  • Rodrik, D. (2008). The real exchange rate and economic growth. Brookings Papers on Economic Activity, Fall, 365-412.
  • Woodford, D. (2008). The real exchange rate and economic growth: comment. Brookings Papers on Economic Activity, Fall, 420-437.
Year 2021, Volume: 21 Issue: 2, 111 - 123, 31.03.2021
https://doi.org/10.21121/eab.907399

Abstract

References

  • Ahmed, S., Gust, C., Kamin, S. & Huntley, J. (2002). Are depreciations as contractionary as devaluations? A comparison of selected emerging and industrial economies. FRB International Finance Discussion Paper No. 737.
  • Ahmed, S., Appendino, M. & Ruta, M. (2015). Depreciations without exports? Global value chains and the exchange rate elasticity of exports. World Bank Policy Research Working Paper No. 7390.
  • Aizenman, J., Chinn, M. & Ito, H. (2015). Monetary policy spillovers and the trilemma in the new normal: periphery country sensitivity to core country conditions. NBER Working Paper 21128.
  • Almansour, A., Aslam, A., Bluedorn, J. & Duttagupta, R. (2015). How vulnerable are emerging markets to external shocks? Journal of Policy Modeling, 37(3), 460-483.
  • Alper, A. M. & Civcir, I. (2012). Can overvaluation prelude to crisis and harm growth in Turkey? Journal of Policy Modeling, 34(1), 112–131.
  • Bahadir, B. & Lastrapes, W. D. (2015). Emerging market economies and the world interest rate. Journal of International Money and Finance, 58, 1–28.
  • Baldwin, R. & Lopez-Gonzalez, J. (2015). Supply-chain trade: a portrait of global patterns and several testable hypotheses. The World Economy, 38(11),1682-1721.
  • Barro, R. J. (2015). Convergence and modernisation. The Economic Journal, 125, 911-942.
  • Bebczuk, R., Galindo, A. & Panizza, U. (2006). An evaluation of the contractionary devaluation hypothesis. Inter-American Development Bank Working Paper No. 582.
  • Bordo, M. D., Meissner, C. M. & Stuckler, D. (2010). Foreign currency debt, financial crises and economic growth: A long-run view. Journal of International Money and Finance, 29(4), 642–665.
  • Bussiere, M., Lopez, C. & Tille, C. (2015). Do real exchange rate appreciations matter for growth? Economic Policy, January, 1–41.
  • Calderón, C. & Fuentes, J. R. (2012). Removing the constraints for growth: Some guidelines. Journal of Policy Modeling, 34(6), 948–970.
  • Calvo, G. A., Leiderman L. & Reinhart, C.M. (1993). Capital inflows and real exchange rate appreciation in Latin America -The role of external factors. IMF Staff Papers, 40(1), 108-51.
  • Calvo, G.A. & Reinhart, C. (2002). Fear of floating. The Quarterly Journal of Economics, 117(2), 379-408.
  • Calvo, G.A., Izquierdo A. & Mejía, L.F. (2004). On the empirics of sudden stops: the relevance of balance sheet effects. NBER Working Paper No. 11492.
  • Catão, L.A.V. & Milesi-Ferretti, G.M. (2014). External liabilities and crises. Journal of International Economics, 94(1), 18-32.
  • Céspedes, L.F. (2005). Financial frictions and real devaluations. Central Bank of Chile Working Papers No. 318.
  • Cespedes, L.F., Chang, R. & Velasco, A. (2003). IS-LM-BP in the pampas. IMF Staff Papers, 50(1), 143–156.
  • Chudik, A. & Pesaran, M. H. (2015). Large panel data models with cross-sectional dependence: a survey. In The Oxford Handbook of Panel Data (B. H. Baltagi, Ed.). 3–45. Oxford University Press, New York.
  • Cline, W.R. (2015). Further statistical debate on “too much finance”. Peterson Institute for International Economics WP 15 - 16.
  • Dell’Erba, S., Hausmann, R. & Panizza, U. (2013). Debt levels, debt composition, and sovereign spreads in emerging and advanced economies. Oxford Review of Economic Policy, 29(3), 518–547.
  • Diaz Alejandro, C. (1965). Exchange rate devaluation in a semi-industrialized country. MIT Press, Cambridge, United States.
  • Di Nino, V., Eichengreen, B. & Sbracia, M. (2011). Real exchange rates, trade, and growth: Italy 1861-201. Bank of Italy Working Paper No: 10.
  • Eberhardt, M. & Teal, F. (2011). Econometrics for grumblers: a new look at the literature on cross-country growth empirics. Journal of Economic Surveys, 25(1), 109–155
  • Eichengreen B. (2008). The real exchange rate and economic growth. World Bank Growth Commission Working Paper No. 4.
  • Eichengreen, B., Hausmann, R., & Panizza, U. (2003). Currency mismatches, debt intolerance and original sin: why they are not the same, why it matters. NBER Working Paper No. 10036.
  • Erdem, F. P. & Özmen, E. (2015). Exchange rate regimes and business cycles: an empirical investigation. Open Economies Review, 26(5), 1041-1058.
  • Feenstra, R. C., Inklaar, R. & Timmer, M. P. (2015). The next generation of the Penn World Table. American Economic Review, 105(10), 3150-3182.
  • Frankel, J.A. (2005). Mundell-Fleming lecture: contractionary currency crashes in developing countries. IMF Staff Papers, 55(2), 149-192.
  • Frankel, J.A. (2011). Monetary policy in emerging markets, in Handbook of Monetary Economics, (B. Friedman and M. Woodford, Eds.) Vol. 3B: 1439-1520 (North Holland: The Netherlands).
  • Galindo, A., Panizza, U. & Schiantarelli, F. (2003). Debt composition and balance sheet effects of currency depreciation: a summary of the micro evidence. Emerging Markets Review, 4, 330-339.
  • Gluzmann, P., Levy-Yeyati E. & Sturzenegger, F. (2012). Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited. Economic Letters, 117, 666-672.
  • Gonzalez-Rozada, M. & Levy-Yeyati, E. (2008). Global factors and emerging market spreads. The Economic Journal, 118 (533), 1917–1936.
  • Guzman, M., Ocampo J. A. & Stiglitz J. E. (2018). Real exchange rate policies for economic development. World Development, 110, 51-62.
  • Habib, M. M., Mileva, E. & Stracca, L. (2017). The real exchange rate and economic growth: Revisiting the case using external instruments. Journal of International Money and Finance, 73, 386-398.
  • IMF (2004). Global financial market developments. Global Financial Stability Report (April, Ch. 2. IMF).
  • Johnson, R.C. (2014). Five facts about value-added exports and implications for macroeconomics and trade research. Journal of Economic Perspectives, 28(2), 119–142.
  • Kesriyeli, M., Özmen, E. & Yiğit, S. (2011). Corporate sector liability dollarization and exchange rate balance sheet effect in Turkey. Applied Economics, 43(30), 4741-4747.
  • Kose, A., Otrok, C. & Prasad, E.S. (2012). Global business cycles: Convergence or decoupling? International Economic Review, 87, 178-90.
  • Krugman, P. (1999). Balance sheets, the transfer problem and financial crises. International Tax and Public Finance, 6, 459- 472.
  • Lane, P. R. & Stracca, L. (2018). Expansionary Appreciation. Economic Policy, April, 225-264.
  • Levin, A., Lin, C. F. and Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of econometrics, 108(1), 1-24.
  • Levy-Yeyati, E., Sturzenegger, F. & Gluzmann, P.A. (2013). Fear of appreciation. Journal of Development Economics, 101, 233–247.
  • Miranda-Agrippino, S. & Rey, H. (2015). World asset markets and the global financial cycle. NBER Working Paper No. 21722.
  • Montiel, P. J. & Serven, L. (2008). Real exchange rates, saving and growth: is there a link?, World Bank Policy Research Working Paper No. 4636.
  • Nouira, R. & Sekkat, K. (2012). Desperately seeking the positive impact of undervaluation on growth. Journal of Macroeconomics, 34(2), 537-552.
  • Obstfeld, M. (2004). Globalization, macroeconomic performance, and the exchange rates of emerging economies. Monetary and Economic Studies, 22(1), 29–55.
  • Obstfeld, M. (2015). Trilemmas and trade-offs: living with financial globalisation. BIS Working Papers No 480.
  • Özatay, F., Özmen, E. & Sahinbeyoglu, G. (2009). Emerging market sovereign spreads, global financial conditions and U.S. macroeconomic news. Economic Modelling, 26(2), 526–531.
  • Özmen, E. & Yaşar, Ö. D. (2016). Emerging market sovereign bond spreads, credit ratings and global financial crisis. Economic Modelling, 59: 93–101.
  • Pedroni, P. (2000). Fully-modified OLS for heterogeneous cointegrated panels. Advances in Econometrics, 15, 93–130.
  • Pedroni, P. (2004). Panel cointegration; asymptotic and finite sample properties of pooled time series tests with an application to the PPP Hypothesis. Econometric Theory, 20(3), 597–625.
  • Pedroni, P. (2007). Social capital, barriers to production and capital shares; implications for the importance of parameter heterogeneity from a nonstationary panel approach. Journal of Applied Econometrics, 22, 429-51.
  • Pesaran, M.H., Shin, Y. & Smith, R.P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94, 621–634
  • Rey, H. (2015). Dilemma not trilemma: The global financial cycle and monetary policy independence. NBER Working Paper No. 21162.
  • Rey, H. (2016). International channels of transmission of monetary policy and the Mundellian trilemma. NBER Working Paper No. 21852.
  • Rockey, J & Temple, J. (2016). Growth econometrics for agnostics and true believers. European Economic Review, 8, 86–102
  • Rodrik, D. (2008). The real exchange rate and economic growth. Brookings Papers on Economic Activity, Fall, 365-412.
  • Woodford, D. (2008). The real exchange rate and economic growth: comment. Brookings Papers on Economic Activity, Fall, 420-437.
There are 59 citations in total.

Details

Primary Language English
Subjects Economics
Journal Section Research Article
Authors

Duygu Yolcu Karadam This is me 0000-0003-3139-2003

Erdal Özmen This is me 0000-0002-9333-8339

Publication Date March 31, 2021
Acceptance Date February 9, 2020
Published in Issue Year 2021 Volume: 21 Issue: 2

Cite

APA Yolcu Karadam, D., & Özmen, E. (2021). Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?. Ege Academic Review, 21(2), 111-123. https://doi.org/10.21121/eab.907399
AMA Yolcu Karadam D, Özmen E. Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?. ear. March 2021;21(2):111-123. doi:10.21121/eab.907399
Chicago Yolcu Karadam, Duygu, and Erdal Özmen. “Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?”. Ege Academic Review 21, no. 2 (March 2021): 111-23. https://doi.org/10.21121/eab.907399.
EndNote Yolcu Karadam D, Özmen E (March 1, 2021) Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?. Ege Academic Review 21 2 111–123.
IEEE D. Yolcu Karadam and E. Özmen, “Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?”, ear, vol. 21, no. 2, pp. 111–123, 2021, doi: 10.21121/eab.907399.
ISNAD Yolcu Karadam, Duygu - Özmen, Erdal. “Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?”. Ege Academic Review 21/2 (March 2021), 111-123. https://doi.org/10.21121/eab.907399.
JAMA Yolcu Karadam D, Özmen E. Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?. ear. 2021;21:111–123.
MLA Yolcu Karadam, Duygu and Erdal Özmen. “Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?”. Ege Academic Review, vol. 21, no. 2, 2021, pp. 111-23, doi:10.21121/eab.907399.
Vancouver Yolcu Karadam D, Özmen E. Real Exchange Rates and Growth: Contractionary Depreciations or Appreciations?. ear. 2021;21(2):111-23.

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