Overvalued Exchange Rate Research Articles

Dilema Harrod-Domar, Lei de Thirlwall e Novo Desenvolvimentismo Verde

ABSTRACT The article aims to address the ecological transition into a model that integrates the Harrod-Domar Dilemma and the New Developmentalism according to a Green New Developmentalism perspective. To this end, this paper focuses on the green sides of the middle-income countries’ traps by introducing a novel concept of the ecologically sustainable output growth rate into the new developmentalism model developed by Oreiro (2023) to identify a balanced ecological growth path. Compensating for the price competitiveness losses produced by the exchange rate over-valuation, Ecological Structural Change and green finance allow for reversing the process of premature de-industrialization by improving the competitiveness of the manufacturing sector.

Ecological transition and structural change: A new-developmentalist analysis

The article aims to analyze the ecological transition and the structural change by considering the role of Medium-Income Trap (MIT) with respect to exchange rate overvaluation and (re)industrialization, according to the structuralist-New Developmentalist Approach. The ecological challenges can be faced by an ecological transition based on Ecological Technological Progress and Ecological Structural Change (ESC). The ESC can be represented by the increase of the share of green activities in output for increasing the environmental efficiency of the economy. The theoretical core of the new developmentalism is the tendency of overvaluation of real exchange rate for middle income countries whose sources are the Dutch disease (and the growth with external saving strategy). This fact generates the MIT concerning the negative impact of overvaluation real exchange rate on the industrial development. Thus, we analyze how the ESC interact with the drivers of overvaluation exchange rate by carrying out a post-Keynesian model based the Structuralist-New Developmentalist features. In this perspective, we integrate the issue of the achievement of the environmental targets as indicated by the Climate International Conferences and by the UN initiative of the Sustainable Developments Goals, to the structural change necessary for the economic catching-up of the middle income (and/or developing) countries.

THIRLWALL’S LAW AND NEW-DEVELOPMENTALISM: WHAT ARE THE LIMITS FOR LONG-RUN GROWTH?

The aim of this article is to argue that New-Developmentalism —understood as an approach to the deep determinants of economic development in which macroeconomic policy regime has a key role in explaining the long-term growth differentials among countries, notably middle-income countries— is not incompatible with Balance of Payments Constrained Growth models pioneered and developed by Professor Thirlwall, but can be considered an extension and improvement of such a class of models in order to incorporate structural change induced by exchange rate overvaluation as the main limit of long-run growth for middle-income dual economies, thereby explaining the so-called middle-income trap.

Sobreapreciação da taxa de câmbio e transferências intersetoriais da renda fundiária no Uruguai: 1955-2019

ABSTRACT This paper measures with a novel methodology the amount of agrarian ground rent intersectoral transfers in Uruguay and its relative weight in the national amount of surplus value during the period 1955-2019. In order to this, the paper identifies the mechanisms through which ground rent is transferred from landowners to industrial and commercial capitals. The main results show that agrarian ground rent transfers, in particular through exchange rate overvaluation, was a recurring mechanism that has been central for capital accumulation. These transfers complement the surplus value appropriated by individual capitals, however, at the same time, consolidate the rentier nature of Uruguay due to the chronic overvaluation of exchange rate.

Segregated Economies in an Integrated World: The Gendered Consequences of Exchange Rate Movements in Low- and Middle-Income Countries

AbstractI argue that exchange rates are an underappreciated explanation for the significant variation in the extent of female labor force participation in developing countries. Occupational segregation in developing countries is such that women working outside of the home tend to be segregated in labor-intensive export-oriented industries. Consequently, when an overvalued exchange rate increases export prices, it reduces commensurately the demand for female labor. This causes some women to drop out of the labor force. Data from over 150 low- and middle-income countries between 1990 and 2015 support this argument.

Capital Account Liberalisation and Crises: A Meta-Analysis

The present study is a critical survey of the literature on the impact of capital account liberalisation on both banking and currency crises. The objective of the study is to identify the publication bias and explore heterogeneity in the extant studies. For measuring the effect size of capital account liberalisation on banking and currency crises, an identification of relevant studies is done. Partial correlation coefficient is used for measuring standardised effect size. Funnel asymmetry test (FAT) and precision effect test (PET–PEE) are used for identifying publication selection bias. Meta-regression analysis (MRA) is done for exploring the heterogeneity in literature. I did meta-analysis on 121 t stats reported in 14 empirical papers. The results of the FAT–PET–PEE test indicate that publication bias does not exist in the literature. The study explains the heterogeneity of results reported in earlier studies. De facto measure, size of economy, inflation, real interest rate differential, real effective exchange rate overvaluation, current account balance to GDP and reserve money to GDP are the major impacting variables of both banking and currency crises. The probit approach is seen to be more appropriate in capturing the above relationship. JEL Codes: C1, F6, G01

Orthodox Stabilization Programs Implemented in Turkey After 1980: Decisions of January 24 and April 5

İstikrar programları, daha çok ödemeler dengesi sorunlarını aşmak ve yüksek enflasyonun hüküm sürdüğü (hiperenflasyon ya da kronik yüksek enflasyon) ekonomiyi normalleştirmek amacıyla uygulamaya konulur. Ortodoks politikalar, ekonomide ortaya çıkan enflasyon, ödemeler dengesi açığı ve kamu açıklarının kaynağı olarak parasal genişlemeyi, aşırı değerlenmiş kur sistemini ve kamu kesimi kaynak harcama dengesizliğini görmektedir. Ortodoks politikalar, enflasyonu salt parasal bir olgu olarak ele alırken; heterodoks politikalar, enflasyonun kaynağında yapısal bozuklukların ve gelir çekişmesinin yattığına ilişkin inançtan hareketle uygulanmaktadır. Heterodoks istikrar politikalarının fiyat-ücret kontrolleri, bütçe disiplini ve sabit döviz kuru politikası olmak üzere üçayağı bulunmaktadır. Çalışmada, Ortodoks istikrar programı niteliğinde olan 24 Ocak ve 5 Nisan kararları, önceki ve sonraki ekonomik yapı analiz edilerek değerlendirilmiştir. Gerçekleşen sonuçları açısından 1980 uygulaması kamu maliyesi dengelerini bozmak, gelir dağılımını etkinsizleştirmek, ekonomiyi spekülatif yabancı sermaye dalgalanmalarına açık hale getirme pahasına ödemeler dengesi sorununu görece aşabilmiştir. 1994 Kararları ise, krizi bir sapma olarak nitelendirip, ekonominin tekrar faiz kur makası sarmalına döndürülmesi sağlanmıştır.

Accelerating Agriculture and Rural Development for Inclusive Growth: Policy Implications for Developing Asia

Developing Asia stands witness to the impact of economic growth on poverty reduction. The incomes and quality of life for many people have improved and poverty levels are falling. But results vary with rural growth lagging behind urban growth in many countries and subregions. Two thirds of the region’s 3 billion people live in rural areas, and in India, for example, 74 percent of people classified as poor are in rural areas (ADB 2004). The difference in urban and rural growth and poverty outcomes is socially and politically untenable, as witnessed in the recent election in India. Rural poverty problems in many cases become urban poverty problems through rising pressure on cities to absorb rural migrants needing jobs, homes, and services. Pre-1980s, the rural economic problem was commonly seen as undersupply of affordable food and raw materials to support industrialization as the engine of rapid growth. The strategy greatly influenced the design and choice of public policies. Overvalued exchange rates were intended to help new industries establish domestic markets and lower costs of imported materials, but lowered the domestic currency earnings for farmers in export markets. Administered food prices lowered consumer prices but lowered returns to farmers as well. Agricultural commodities and land were heavily taxed to force the transfer of resources out of rural areas. Farm input subsidies encourage production of food crops but lead to resource wastage, and often benefit well-to-do farmers. Such policy biases lower agriculture’s terms of trade, distort market signals, and undermine agricultural growth (Krueger 1992).In the above back setting. An attempt is made to briefly outlines the potential for agriculture and rural development as a critical force for inclusive growth and sustained poverty reduction and reviews experiences in the Asian region with agriculture in economic transformation. It highlights major policy challenges for accelerating agriculture and rural development.

Financialisation of monetary policy in a dollarised economy: the case of Georgia

Abstract This paper examines the financialisation of monetary policy—articulated as inflation targeting—and provides insight on the implications this phenomenon has on dollarised economies. The analysis provided has been developed via a thorough investigation into these dynamics in the country of Georgia: a neoliberal and foreign direct investment (FDI)-led accumulation regime with an open capital account, where the inflow of foreign capital led to enhanced lending by foreign-owned banks in foreign currency and encouraged persistent dollarisation. This paper contributes to the literature on the role of foreign capital in developing economies, and the volatilities of these economies in terms of overvalued exchange rates, capital flight and rise of public debt. This paper concludes that the financialisation of monetary policy has encouraged the process of dollarisation in Georgia. The use of inflation targeting was an ineffective strategy for Georgia’s dollarised economy due to the primacy of price stability over currency stability, the reduction of the capacity of Georgia’s central bank as well as increased economic influence of foreign-owned commercial banks.

A meta de inflação é desestabilizadora? Lições da América Latina

ABSTRACT This paper argues that several aspects of the productive structure and the macroeconomic policies of Latin American countries, when combined with a Taylor Rule, may produce too much output volatility and a bias towards real exchange rate overvaluation. Relaying on a simple Aggregate Demand - Aggregate Supply model, we show that this is a likely outcome when: a) the real interest rate elasticity of demand is low; b) depreciations have strong contractionary effects; and c) the exchange rate pass-through is relatively large. These conditions imply that depreciations are contractionary and a have a strong effect on inflation.

An ecological view of New Developmentalism: a proposal of integration

ABSTRACT Article aims to integrate New Developmentalism with Ecological View by means of the concepts of Ecological Structural Change (ESC) and Eco-Developmental Class-Coalition (EDCC). ESC means to increase the share of green manufacturing sector in GDP and employment for increasing the environmental efficiency of the economy. Exchange rate overvaluation caused by Dutch disease and growth with foreign savings can harm green manufacturing industries even more than brown manufacturing industries. ESC needs the existence of an EDCC that can be made difficult to occur if exchange rate over-valuation is not removed through taxes over commodities exports, capital controls and a dual mandate for the Central Bank.

Exchange rate misalignments, capital flows and volatility

This study investigates the effect of three dimensions of exchange rate misalignments—(i) distance (absolute misalignments), (ii) direction (overvaluation or undervaluation), and (iii) degree (small or large misalignments)—on the overall as well as short-cycle exchange rate volatility. Using data from 1988 to 2014, we find that relative PPP-based exchange rate misalignments increase exchange rate volatility. For developed and developing countries, this increase in volatility is driven mainly by large undervalued misalignments of the U.S. dollar. This finding might be linked to interventions targeting the loss in domestic producers’ competitiveness in global markets. Interestingly, in the case of developed countries, we find this adverse effect on exchange rate volatility also for small absolute misalignments; exchange rate movements close to equilibrium may be associated with ambiguity with respect to future movements in developed countries, which can result in higher exchange rate volatility. Further, the results suggest that, when the dollar is highly undervalued, capital flows have a stabilizing effect on exchange rate volatility in developed countries but a destabilizing effect in developing countries. The finding is consistent with investors’ strategy of taking exchange rate overvaluation and undervaluation into account when engaging in cross-border investments.

Real Exchange Rate Misalignment and Economic Growth Nexus: Evidence from Southern African countries

This paper investigates the link between real exchange rate misalignment and Southern African countries' economic growth. The study used panel data for 16 Southern African countries over 17 years. Generalized methods of moments (GMM) was applied to analyze the panel growth equation. The estimated results have suggested that the real exchange rate, real exchange rate misalignment, terms of trade, and foreign direct investment explains variation in income growth of southern African countries. The real exchange rate appreciation over the study period has adversely affected growth, whereas real exchange rate undervaluation suggests a positive impact on annual income growth. Unfavourable terms of trade were found to hurt growth, whereas foreign direct investment upsurge stimulates growth. Thus, policymakers in their respective African countries ought to diligently monitor real exchange rate misalignment in the foreign exchange market. An increase in real exchange rate overvaluation may adversely affect the trade and current account balances, which might ultimately hurt growth.

Technology in agriculture and structural change: an Asian perspective

ABSTRACT Structural change is important in the overall development process. This paper seeks to examine how productivity growth in agriculture influences this process. In particular, technology in agriculture is divided into two types: labour using, land saving (biochemical) and labour saving, land using (mechanical). Some have argued that only labour saving (mechanical) technology promotes the shift of labour into manufacturing, not labour using (biochemical) technology. However, estimations utilizing data from 10 Asian nations indicate that both types of technologies promote structural change. Thus, investments in such technologies will promote structural change. Additional results indicate that labour productivity growth in services is complementary to structural change. In addition, openness to trade and foreign direct investment and diversification away from natural resource abundance as well as avoiding exchange rate overvaluation also promote structural change.

Deindustrialization, economic complexity and exchange rate overvaluation: the case of Brazil (1998-2017)

We analyze the determinants of the deindustrialization of the Brazilian economy in the period between 1998 and 2017. This is a typical example of ‘premature deindustrialization’ in the sense that the major reason for the fall in the manufacturing share has not been the increase in per-capita income but rather real exchange rate overvaluation. In the Brazilian case, real exchange rate overvaluation results both from an appreciation of the real effective exchange rate, and an increase in the equilibrium value of the real exchange rate, the “industrial equilibrium exchange rate” of the new developmentalist literature. The elimination of the real exchange rate overvaluation requires not only the adoption of a macroeconomic policy regime in which some kind of real exchange rate targeting is adopted, but also industrial policies designed for increasing the economic complexity of the Brazilian economy and, hence, to reduce the equilibrium value of the real exchange rate. JEL codes : O11, O14, O24

Profit margins, exchange rates and structural change: empirical evidences for the period 1996-2017

ABSTRACT This research seeks to understand the relationship between the rate of profit and the exchange rate and how this relationship can impact the productive structure. We construct a theoretical model in which the exchange rate influences the rate of profit, and we argue that although an overvalued exchange rate could benefit sectors with high imported input coefficients in the short term because it reduces costs, it negatively impacts the demand for their products and also reduces the aggregatedemand; hence, an overvalued exchange rate could shrink the profit rate of these sectors in the medium term. In the Brazilian case, these sectors are the high technological-content manufacturing sectors.

Global Implications of a US-Led Currency War

In 2019, President Trump called on the U.S. Federal Reserve to cut interest rates to depreciate the U.S. dollar, which, according to the IMF, is overvalued by between 6 and 12 percent. This paper uses an intertemporal general equilibrium model to explore what would likely happen if the President’s wish was granted. Using the G-Cubed (G20) model, it shows that the general equilibrium effects of a depreciated real effective exchange rate brought about by lower U.S. interest rates can result in a wide variety of unintended consequences, many of which contradict the stated aims of President Trump and his administration. Such a policy would likely result in a larger U.S. trade deficit, would only temporarily devalue the real effective exchange rate and would only temporarily support the U.S. economy. The policy would boost the trade balances of most U.S. trading partners, depreciate China’s exchange rate and boost China’s GDP. Given the policy would make the overvalued exchange rates of many economies even more overvalued, the paper explores what would happen if U.S. trading partners were to retaliate by devaluing their currencies. It shows that this makes it harder for the U.S. to achieve its objectives and forces a more severe adjustment for economies that presently have undervalued exchange rates.

Real exchange rate misalignments in CEECs: Have they hindered growth?

We study the impact of exchange rate misalignment on economic activity in nine Central and Eastern European economies. Exchange rate misalignments are computed from country-specific long-run exchange rate relationships with determinants suggested by open macroeconomic models such as interest rate differentials or the Balassa–Samuelson effect. There was a clear reduction in misalignments, but this has been reversed to some extent after 2008. Exchange rate overvaluation has a negative impact on economic activity. The effect of misalignments on economic activity seems to be nonlinear, as overvaluation has a stronger effect than undervaluation. Other factors of economic activity, including institutions, also show nonlinear effects.

Pakistan

Pakistan’s economy is at a critical juncture. Misaligned economic policies, including large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate, fueled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves. Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss making SOEs, and low labor productivity amid a large informal economy. Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population.

Ethiopia's Downgrade to High Risk of Debt Distress: A Policy Framework for the Government

Ethiopia was downgraded to high risk of debt distress in January 2018 based on the Low-Income Country Debt Sustainability Framework (LIC DSF), a finding reaffirmed by the updated 2017 Review of the LIC DSF, which was rolled out in the second half of 2018. This finding illustrates the shortcomings of the LIC DSF, which were supposed to have been addressed by the 2017 Review. The fundamental problem is a continued myopic focus on debt distress in relation to external public debt. In Ethiopia’s case — as with most LICs — external debt distress is a symptom of unsustainable public debt dynamics driven by high fiscal deficits that spill over into current account deficits and external debt. Ignoring this fundamental causation results in basic development questions being left off the table. For Ethiopia, these questions include: (a) What would the government’s debt dynamics look like in the absence of financial repression and overvalued exchange rates, both of which need to be corrected in order to improve the private investment climate as the Government prepares to hand off the growth baton to the private sector? And (b) will the large public investments in infrastructure pay off in terms of future growth and taxes in order to ensure fiscal solvency? The Government of Ethiopia needs answers to these questions as it implements its growth strategy and pursues its dialogue with donors and the private sector.