Growth and the Real Exchange Rate - Evidence from Eleven Countries

Abstract

There are conflicting theories about the effect of real exchange rate movements on output growth. Expenditure switching models suggest that a real depreciation leads to an increase in net exports due to the increase in competitiveness of the export sector, and hence to an increase in output growth. Contractionary depreciation models, on the other hand, suggest that real depreciations can reduce output growth. In this paper we examine the evidence on the impact of real exchange rate movements on the real economy for a number of countries. We find that different countries have had quite different experiences with respect to the response of output growth to exchange rate changes, and we offer some suggestions as to why this has been the case.