Description

We evaluate the growth effects of real exchange rate (RER) misalignments and their volatility. We calculate RER misalignments as de viations of actual RERs from their equilibrium for 60 countries over 1965-2003 using panel and time series cointe gration methods. Using dynamic panel data techniques we find that RER misalignments hinder grow th but the effect is non-linear: growth declines are larger, the larger the size of the misalignmen ts. Although large undervaluations hurt growth, small to moderate undervaluations enhance growth. These results are robust when controlling for movements in the equilibrium real exchange rate. Howe ver, we find that it is difficult to follow a pro- growth RER policy. Finally, growth is hamp ered by highly volatile RER misalignments.