A PANEL VAR ANALYSIS OF THE DYNAMIC IMPACT OF UNDERVALUATION ON ECONOMIC GROWTH IN LATIN AMERICAN COUNTRIES

Abstract

This study analyzes the dynamic effects of undervaluation on the economic growth per capita of Latin American countries from 1980 to 2018. To estimate these effects, a panel vector autoregressive (PVAR) model was used with the System GMM as its estimator. The undervaluation variable is created from different measures of real exchange rates. In addition, various measures of GDP per capita were used to calculate economic growth per capita. Macroeconomic and human capital variables were included to control for the different undervaluation spread channels on economic growth per capita. Results show a positive effect depending on the definition of the real exchange rate used to calculate the undervaluation. Results also include the Granger causality test, a stability test, and impulse response graphs that project the response of per capita economic growth to an undervaluation shock.