the real exchange rate and economic growth, theory and evidence by dani rodrik

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The Real Exchange Rate and Economic Growth: Theory and Evidence Dani Rodrik John F. Kennedy School of Government Harvard University Cambridge, MA 02138 August 2007 Abstract I provide evidence that undervaluation (a high real exchange rate) stim- ulate s econ omic growth. This is true particularly for developing countries, suggesting that tradable goods su¤er disproportionately from the distortions that keep poor coun tries from converging. I pres ent two catego ries of expla- nations as to why this may be so, focusing on (a) institutional/contractual wea knesses, and (b) market failures. A formal model elucidates the linkages between the level of the real exchange rate and the rate of economic growth. 1 Introduction Economists have long known that poorly managed exchange rates can be disastrous for econo mic gro wth . Avoiding overvaluation of the cur ren cy is one of the most robust imperatives that can be gleaned from the diverse experience with economic growth around the world, and it is one that appears to be strongly supported by cross-country statistical evidence (Razin and Collins 1997, Johnson, Ostry, and Sub- rama nian 2007 ). The results in the well-kn ow n papers of Dollar (1992) and Sachs I thank the Center for International Development for partial …nancial support. David Mericle and Olga Rosta psho v a provided expert research assistance. I also thank Nathan Nunn for sharing his unpublis hed date with me. Ricar do Hausmann , Arvi nd Subra mani an, John Willia mson hav e kindly provided comments. 1

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