Abstract
We analyse the impact of exchange rate misalignment on economic growth for a sample of emerging economies from 1970 to 2014 using a panel smooth transition regression vector error correction model. Besides, we provide a granger causality test conducted in a non-linear framework. We find that a rise in misalignment increases significantly the output in the short-run when currencies are close to equilibrium. When they are highly misaligned, the impact on growth is reduced. However, no significant impact of output on misalignment was found in the short-run. We provide evidence that misalignment granger causes the output at any given level of misalignment both in the short and long-run. Weaker granger causality was found between output and misalignment. This raises some important policy implications. Although emerging economies can use undervaluation as a growth strategy, the benefits are smaller when currencies are highly undervalued. There is, therefore, an incentive to keep exchange rates closer to their equilibrium.
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Supplemental Material
The online version of this article offers supplementary material (DOI: https://doi.org/10.1515/snde-2016-0117).
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Articles in the same Issue
- Markov-switching quantile autoregression: a Gibbs sampling approach
- Uncertainty in the housing market: evidence from US states
- Exchange rate misalignment and economic growth: evidence from nonlinear panel cointegration and granger causality tests
- Causal relationships between economic policy uncertainty and housing market returns in China and India: evidence from linear and nonlinear panel and time series models
- Estimation and inference of threshold regression models with measurement errors
- The spurious effect of ARCH errors on linearity tests: a theoretical note and an alternative maximum likelihood approach