Export Surges: The Power of a Competitive Currency

58 Pages Posted: 20 Apr 2016

See all articles by Caroline L. Freund

Caroline L. Freund

World Bank - Macro, Trade and Investment

Martha Denisse Pierola

World Bank - Development Research Group (DECRG)

Date Written: October 1, 2008

Abstract

How can countries stimulate and sustain strong export growth? To answer this question, the authors examine 92 episodes of export surges, defined as significant increases in manufacturing export growth that are sustained for at least seven years. They find that export surges in developing countries tend to be preceded by a large real depreciation - which leaves the exchange rate significantly undervalued - and a reduction in exchange rate volatility. In contrast, in developed countries, the role of the exchange rate is less pronounced. The authors examine why the exchange rate is so important in developing countries and find that the depreciation leads to a significant reallocation of resources in the export sector. In particular, depreciation generates more entries into new export products and new markets, and the percentage of new entries that fail after one year declines. These new products and new markets are important, accounting for 25 percent of export growth during the surge in developing countries. The authors argue that maintaining a competitive currency leads firms to expand the product and market space for exports, inducing a large reorientation of the tradable sector.

Keywords: Currencies and Exchange Rates, Emerging Markets, Debt Markets, Economic Theory & Research, Achieving Shared Growth

Suggested Citation

Freund, Caroline L. and Pierola, Martha Denisse, Export Surges: The Power of a Competitive Currency (October 1, 2008). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1293163

Caroline L. Freund (Contact Author)

World Bank - Macro, Trade and Investment ( email )

1818 H Street, N.W.
MC3-329
Washington, DC 20433
United States
(202)458-0847 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/cfreund

Martha Denisse Pierola

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street N.W.
MSN3-311
Washington, DC 20433
United States

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