The Real Exchange Rate and Economic Growth: Revisiting the Case Using External Instruments

33 Pages Posted: 19 Jun 2016

See all articles by Maurizio Michael Habib

Maurizio Michael Habib

European Central Bank (ECB)

Elitza Mileva

European Central Bank; Fordham University - Economics Department

Livio Stracca

European Central Bank (ECB)

Date Written: June 17, 2016

Abstract

We investigate the impact of movements in the real exchange rate on economic growth based on five-year average data for a panel of over 150 countries in the post Bretton Woods period. Unlike previous literature, we use external instruments to deal with possible reverse causality from growth to the real exchange rate. Our country-specific instruments are (i) global capital flows interacted with individual countries financial openness and (ii) the growth rate of official reserves. We find that a real appreciation (depreciation) reduces (raises) significantly annual real GDP growth, more than in previous estimates in the literature. However, our results confirm this effect only for developing countries and for pegs.

Keywords: real exchange rate, economic growth, instrumental variables, panel data

JEL Classification: F31, F43

Suggested Citation

Habib, Maurizio Michael and Mileva, Elitza and Stracca, Livio, The Real Exchange Rate and Economic Growth: Revisiting the Case Using External Instruments (June 17, 2016). ECB Working Paper No. 1921. Available at SSRN: https://ssrn.com/abstract=2797378

Maurizio Michael Habib (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Elitza Mileva

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Fordham University - Economics Department ( email )

441 East Fordham Road
Bronx, NY 10458
United States

Livio Stracca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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