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Empirical Economics

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12-10-2017

The real effect of currency misalignment on productivity growth: evidence from middle-income economies

Author: Bernard Njindan Iyke

Published in: Empirical Economics | Issue 4/2018

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Abstract

There have been interesting perspectives on the role of real currency misalignment in productivity growth. Whereas some studies warn against the destructive effect of real currency misalignment on productivity growth, others simply encourage it, at least, in the form of undervaluation. This paper documents evidence in support of the latter argument for 100 middle-income countries for the 1994–2010 period, using fixed-effects and generalized method of moments estimation techniques. The paper finds real currency misalignment to enhance productivity growth if it occurs as undervaluation; and to hamper productivity growth if it occurs as overvaluation. The paper also finds the impact of real currency misalignment on productivity growth to be symmetric, implying that the size of the impact is independent of the size of the misalignment. Moreover, the choice of the real misalignment measure may matter.

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For the familiar reader, this is the “fear-of-floating” syndrome documented in the exchange rate literature.

See Woodford (2009), for extensive discussion of this matter.

See the World Bank’s classification of countries by income available at https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups.

These countries are presented in Table 6 in “Appendix”.

See Hinkle and Montiel (1999) and Lee et al. (2008) for a survey of the literature.

Note that in accounting for the Balassa–Samuelson–Bhagwati effect, Rodrik (2008), Elbadawi et al. (2012) and Rapetti et al. (2012) use real GDP per capita. This may not be appropriate, as pointed out by Officer (1976). Therefore, we use relative real GDP per capita to measure productivity as suggested by Officer (1976) and other studies.

The interested reader may obtain this classification at https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups.

The caveat is that these tests are not very powerful in short-panel data (see, for example, Levin et al. 2002; Im et al. 2003).

Note that the conclusion is the same when we included population density in the Eq. (2), as proposed by Dollar (1992). The estimate of \(\psi \) is \(-\) 0.2298 with a p value of 0.010 shows that the Balassa–Samuelson–Bhagwati hypothesis is supported.

We did not take the logarithm of population growth because some of the observations are negative.

The sign depends on how the index is calculated. For the studies which defined it opposite to ours (for instance, Gala 2008; Rodrik 2008; Glüzmann et al. 2012), the sign is positive. The interpretation of the results is the same, nevertheless.

See Rodrik (2008), for similar discussion.

The estimated coefficient is similar to that reported by Aghion et al. (2009) in their paper.

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Title: The real effect of currency misalignment on productivity growth: evidence from middle-income economies
Author: Bernard Njindan Iyke
Publication date: 12-10-2017
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 4/2018
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-017-1344-0

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