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Exchange rate misalignment and economic growth : on the possible transmission channels for emerging economies
Tipoy, Christian Kakese; Breitenbach, M.C. (Marthinus); Zerihun, Mulatu F.
Despite the large body of work that exists on the impact of exchange rate
undervaluation on economic growth, only a mere literature focuses on the potential
transmission mechanisms. There are authors who consider the size of the tradable
sector as the operative channel through which undervaluation impacts economic
growth. This is due to poor contracting environment and market failures that are
prominent in the tradable sector as bad institutions “tax” tradables more than nontradables.
We look at this issue in this article for a set of emerging economies using
annual data from 1970 to 2014. We find that the size of the tradable sector is
indeed the operative channel through which undervaluation impacts growth. We
have ruled out that bad institutions “tax” tradables more than non-tradables. Our
results, robust to different undervaluation indexes, highlight instead the importance
of total factor productivity surge induced by an undervaluation in increasing growth.