Open AccessReal Exchange Rate, Effective Demand, and Economic Growth
Author(s) -
Francisco MartinezHernández
Publication year - 2019
Publication title -
reflexões econômicas
Language(s) - English
Resource type - Journals
ISSN - 2447-9705
DOI - 10.36113/rec.v4i1.2559
Subject(s) - economics , currency , monetary economics , exchange rate , developing country , stock (firearms) , effective exchange rate , balance of trade , index (typography) , investment (military) , consumption (sociology) , macroeconomics , econometrics , international economics , mechanical engineering , social science , sociology , politics , economic growth , world wide web , computer science , law , political science , engineering
This paper seeks to assess the effects of an undervalued currency on economic growth. Based on a reformulation of Rodrik’s undervaluation index, our econometric results suggest that real exchange rate undervaluation has, to differing degrees, been able to enhance the economic growth of developed and developing countries. Nevertheless, when we disaggregate the main components of aggregate demand for different clusters of developed and developing countries using the Stock Flow Consistent approach (SFC), we find that in general, an undervalued currency has expansionary and contractionary effects in the short-run, specifically via the export sector and the level of aggregate consumption, respectively. This paper also estimates the effects of an undervalued currency on the level of investment and the trade balance.