The equilibrium real exchange rate and macroeconomic performance in developing countries

ABSTRACT

This article presents first estimates of the growth impact of the equilibrium real exchange rate (ERER) for a sample of 63 developing countries over 1970–2007. The results suggest that real exchange rate misalignment, not the level of the ERER, matters for macroeconomic performance in these countries.

KEYWORDS:

• Equilibrium real exchange rate
• economic growth
• developing countries

JEL CLASSIFICATION:

• F31
• F41
• F43
• O11

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ An increase in real exchange rate (RER) means depreciation.

² Note that the index numbers are not comparable across countries. A RER above the equilibrium RER (ERER) indicates real undervaluation.

³ I set and . Note that the results are not affected by these particular parameter settings.

⁴ All the system generalized methods of moments (SGMM) regressions pass the of overidentifying restrictions and the test for second-order autocorrelation suggesting that the SGMM moment conditions are not violated.

⁵ RER misalignment is calculated as , where positive values denote RER overvaluation. I use the absolute value of RER misalignment as a control due to the results of Schröder (2013) who finds a negative growth effect of both RER overevaluation and undervaluation.