Fixed Exchange Rate Regimes, Real Undervaluation, and Economic Growth

Abstract

Using data on sectoral value added and purchasing power parity converter, we are able to estimate the home country’s industrial-service (quasi-) relative-relative total factor productivity (TFP) against the United States. Applying those estimates, our econometric exercises provide robust results showing that the fixed exchange rate regime (FERR) dampens the Balassa–Samuelson effect, and the real undervaluation thus created promotes growth. We also explore the channels of undervaluation to promote growth. Lastly, we compare industrial countries and developing countries and find that the FERR has more significant effects in developing countries than in industrial countries.