The real exchange rate and economic growth

Abstract

I provide evidence that undervaluation of the currency (a high real ex- change rate) stimulates economic growth. This is true particularly for devel- oping countries. There is also some evidence that the operative channel is the size of the tradable sector (especially industry). These …ndings suggest that tradable goods su¤er disproportionately from the government or market fail- ures that keep poor countries from converging towards higher-income levels. I present two categories of explanations as to why this may be so, focusing on (a) institutional weaknesses, and (b) product-market failures. A formal model elucidates the linkages between the level of the real exchange rate and the rate of economic growth.