Exchange rate misalignments and economic growth: A threshold panel approach

This study deals with the link between exchange rate misalignments (ERM) and economic growth, for a large sample of advanced and emerging economies on the period 1982-2010. The estimation of equilibrium exchange rate (EER) is based on a FEER approach. The relation "misalignments-growth" is estimated using a PSTR (Panel Smooth Transition Regression) and GMM models. Our main results show that the impact of ERM on economic growth is nonlinear and asymmetric. An overvaluation has a negative impact on growth while an undervaluation sustains growth until an estimated threshold (15.5% for emerging countries and 9% for developed countries). The coefficient is weaker for emerging countries (0.02) than for developed countries (0.08). Due to non linearity and coefficient's value, the undervaluation has a positive effect on growth even beyond the threshold. We also demonstrate that the impact of ERM on growth is positive only in the case of small undervaluation for emerging countries. However, concerning developed countries, the undervaluation have a positive effect on growth even beyond the estimated threshold.