The study estimates the impact of real effective exchange rate (REER) deviations from 'equilibrium' values that are consistent with selected macroeconomic variables for economic growth in 54 advanced and emerging economies in the period 1980-2015. In particular, the analysis assesses the effect of REER misalignments on the degree of the allocative efficiency of labour and capital across economic sectors and, ultimately, on growth.
The analysis shows that both overvaluations and undervaluations of REERs, relative to their 'equilibrium' values, hinder growth as they lead to excessively large (in labour terms) low-productivity sectors and excessively small high-productivity sectors. The correction of REER imbalances thus stimulates economic activity via a more efficient allocation of labour across sectors.
Published in 2023 in: Review of International Economics, v. 31, 4, pp. 1329-1384.
