BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 23/2015:
Fixed exchange rate regimes, real undervaluation and economic growth
Rui Mao ()
and Yang Yao ()
Abstract: This paper empirically studies how a fixed exchange rate
regime (FERR) may promote economic growth by undermining the
Balassa-Samuelson effect. When total factor produc-tivity (TFP) is faster
in the industrial sector than in the non-tradable sectors, an FERR can
suppress the Balassa-Samuelson effect if adjustment of domestic prices is
subject to nominal rigidities. With WDI data on sectoral value-added and
data from the PPP converter provided by the Penn World Table, we are able
to estimate the home country’s industrial-service (quasi-)
relative-relative TFP in comparison with the United States. Applying those
estimates, our econometric exercises then provide robust results that an
FERR dampens the Balassa-Samuelson effect and that the real undervaluation
that ensues does indeed promote growth. We also explore the channels for
undervaluation to promote growth. Lastly, we compare industrial countries
and developing countries and find that an FERR has more significant impacts
on developing countries than on industrial countries.
Keywords: fixed exchange rate regime; real undervaluation; economic growth; (follow links to similar papers)
JEL-Codes: F31; F43; O41; (follow links to similar papers)
39 pages, August 10, 2015
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
dp2315.pdf 
Download Statistics
Questions (including download problems) about the papers in this series should be directed to Päivi Määttä ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
