Would a competitive real exchange rate be a driver of economic prosperity?


  • Hugo Iasco-Pereira Federal University of Paraná
  • Fabrício José Missio Federal University of Minas Gerais




Real Exchange Rate, International Competitiveness, Economic Growth


This article assesses the effects of real exchange rate misalignment on long-term growth, between 1995 and 2018, in a set of 151 countries. Our findings indicate that a competitive real exchange rate is positively associated with growth over the long run. The novel element here is our demonstration that the enhanced international competitiveness generated by lower labor costs may increase growth. The study also includes a series of robustness checks and alternative estimates to better understand this association, using seven different measures of real exchange rate misalignment, controlling for the possibility that the real exchange rate has a non-monotonic effect on growth, testing the Washington Consensus, separately estimating the effects of real exchange rate devaluation and overvaluation, testing the argument that a real exchange rate policy is an important factor in explaining why Asian economies perform better than Latin American and African ones, and employing alternative measures for real exchange rate misalignment.


Acemoglu D., Johnson S., Robinson J. and Thaicharoen Y. (2003), “Institutional causes, macroeconomic symptoms: volatility, crises and growth”, Journal of Monetary Economics, 50 (1), pp. 49-123.

Acemoglu D.and Robinson J.A. (1999), “On the political economy of institutions and development”, American Economic Review, 91 (4), pp. 938-963.

Aguirre A. and Calderón C. (2005), “Real Exchange Rate Misalignments and Economic Performance, Working Papers, n. 315, Santiago: Central Bank of Chile.

Amsden A. (1989), Asia’s Next Giant: South Korea and Late Industrialization, New York: Oxford University Press.

Ang Y. (2016), How China Escaped the Poverty Trap, Ithaca (NY) and London: Cornell University Press.

Bahmani-Oskooee M. and Hajilee M. (2010), “On the relation between currency depreciation and domestic investment”, Journal of Post Keynesian Economics, 32 (4), pp. 645-660.

Barbosa L.O.S., Jayme F.G. and Missio F.J. (2017), “Managing real exchange rate for economic growth: Empirical evidences from developing countries”, Journal of Post Keynesian Economics, 41 (4), pp. 598-619.

Barro R.J. and Lee J.W. (2000), “International Data on Educational Attainment: Updates and Implications”, NBER Working Paper, n. 7911, September, Cambridge (MA): National Bureau of Economic Research.

Berg A. and Miao Y. (2010), “The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back?”, IMF Working Paper, n. 10/58, Washington (DC): International Monetary Fund.

Berg A., Ostry J. and Zettelmeyer J. (2012), “What makes growth sustained?”, Journal of Development Economics, 98 (2), pp. 149-166.

Bhaduri A. and Marglin, S. (1990), “Unemployment and the real wage: the economic basis for contesting political ideologies”, Cambridge Journal of Economics, 14 (4), pp. 375-393.

Bhalla S. (2012), Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences, Washington (DC): Peterson Institute for International Economics.

Blecker R.A. (1989), “International competition, income distribution and economic growth”, Cambridge Journal of Economics, 13 (3), pp. 395-412.

Bresser-Pereira L.C. (2010), Globalization and competition: why some emergent countries succeed while others fall behind, Cambridge (UK): Cambridge University Press.

Bresser-Pereira L.C., Oreiro J.L. and Marconi N. (2014), Developmental Macroeconomics: New Developmentalism as a Growth Strategy, Abingdon (UK): Routledge.

Caglayan M. and Demir F. (2019), “Exchange rate movements, export sophistication and direction of trade: the development channel and North-South trade flows”, Cambridge Journal of Economics, 43 (6), pp. 1623-1652.

Chu Y. (2016), “The Asian Developmental State: Ideas and Debates”, in Chu Y.W. (ed.), The Asian Developmental State: Reexaminations and New Departures, New York: Springer, pp. 1-25.

Cottani J., Cavallo D. and Khan M. (1990), “Real Exchange Rate Behavior and Economic Performance in LDCs”, Economic Development and Cultural Change, 39 (1), pp. 61-76.

Couharde C., Delatte A., Grekou C., Mignon V. and Morvillier F. (2017), “EQCHANGE: A World Database on Actual and Equilibrium Effective Exchange Rates”, CEPII Working Paper, n. 2017-14 – July, Paris: Centre d’Etudes Prospectives et d’Informations Internationales.

De Carvalho Filho I. and Chamon M. (2008), “A micro-empirical foundation for the political economy of exchange rate populism”, IMF Staff Papers, 55 (3), Washington (DC): International Monetary Fund, pp. 481-510.

Demir F. and Razmi A. (2021), “The Real Exchange Rate and Development Theory, Evidence, Issues and Challenges”, Journal of Economic Surveys, 36 (2), p. 386-428.

Diaz Alejandro C. (1963), “A Note on the Impact of Devaluation and the Redistributive Effect, Journal of Political Economy, 71 (6), pp. 577-580.

Dixon R. and Thirlwall A.P. (1975), “A Model of Regional Growth-Rate Differences on Kaldorian Lines”, Oxford Economic Papers, New Series, 27 (2), pp. 201-214.

Dollar D. (1992), “Outward-oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985”, Economic Development and Cultural Change, 40 (3), pp. 523-534.

Easterly W. (2001), “The Lost Decades: Developing Countries’ Stagnation in Spite of Policy Reform 1980-1998”, Journal of Economic Growth, 6 (2), pp. 135-157.

Eichengreen B. (2007), “The real exchange rate and economic growth”, Social and Economic Studies, 56 (4), pp. 7-20.

Frenkel R. and Ros J. (2006), “Unemployment and the Real Exchange Rate in Latin America”, World Development, 34 (4), pp. 631-646.

Frieden J. (2015), Currency Politics: The Political Economy of Exchange Rate Policy, Princeton (NJ): Princeton University Press.

Gabriel L. and Missio F. (2018), “Real exchange rate and economic complexity in a North-South structuralist BoPG model”, PSL Quarterly Review, 71 (287), pp. 439-465.

Gabriel L., Ribeiro L., Jayme Jr. F. and Oreiro J.L. (2020), “Manufacturing, economic growth, and real exchange rate: Empirical evidence in panel data and input-output multipliers”, PSL Quarterly Review, 73 (292), pp. 51-75.

Gala P. (2007), “Real Exchange Rate Levels and Economic Development: Theoretical Analysis and Empirical Evidence”, Cambridge Journal of Economics, 32 (2), pp. 273-288.

Glüzmann P., Levy-Yeyati E. and Sturzenegger F. (2012), “Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited”, Economic Letters, 117 (3), pp. 666-672.

Guzman M., Ocampo J.A. and Stiglitz J.E. (2018), “Real exchange rate policies for economic development”, World Development, 110, pp. 51-62.

Hausmann R., Pritchett L. and Rodrik D. (2005), “Growth Accelerations”, Journal of Economic Growth, 10 (4), pp. 303-329.

Johnson S., Ostry J. and Subramanian A. (2007), “The Prospects for Sustained Growth in Africa: Benchmarking the Constraints”, IMF Working Papers, n. 2007/052, Washington (DC): International Monetary Fund.

Kaldor N. (1966), Causes of the Slow Rate of Economic Growth of the United Kingdom: An inaugural lecture, London: Cambridge University Press.

Kaldor N. (1970), “The Case for Regional Policies”, Scottish Journal of Political Economy, 17 (3), pp. 337-443.

Levy-Yeyati E., and Sturzenegger F. (2009), “Fear of appreciation: exchange rate policy as a development strategy”, in Hammond G., Kanbur R. and Prasad E. (eds.), Monetary Policy Frameworks for Emerging Markets, Cheltenham (UK) and Northampton (MA): Edward Elgar Publishing.

Marconi N., Araujo E., Brancher M.C. and Porto T.C. (2021), “The relationship between exchange rate and structural change: an approach based on income elasticities of trade”, Cambridge Journal of Economics, 45 (6), pp. 1297-1318.

Mbaye S. (2013), “Currency undervaluation and growth: Is there a productivity channel?”, International Economics, 133, pp. 8-28.

Missio F., Jayme Jr. F., Britto G., Oreiro J. (2015), “Real Exchange Rate and Economic Growth: New Empirical Evidence”, Metroeconomica, 66 (4), pp. 686-714.

Nurkse R. (1945), “Conditions of International Monetary Equilibrium”, Essays in International Finance, n. 4, Princeton (NJ): International Finance Section, Department of Economics, Princeton University.

Oreiro J.L. (2020), “New Developmentalism: beyond competitive exchange rate”, Brazilian Journal of Political Economy, 40 (2), pp. 238-242.

Oreiro J.L., D’Agostini L. and Gala P. (2020a), “Deindustrialization, economic complexity and exchange rate overvaluation: the case of Brazil (1998-2017)”, PSL Quarterly Review, 73 (295), pp. 313-341.

Oreiro J.L., da Silva K.M. and Dávila-Fernández M.J. (2020b), “A New Developmentalist model of structural change, economic growth and middle-income traps”, Structural Change and Economic Dynamics, 55, pp. 26-38.

Rapetti M. (2020), “The real exchange rate and economic growth: A survey”, Journal of Globalization and Development, 11 (2).

Rapetti M., Skott P. and Razmi A. (2012), “The Real Exchange Rate and Economic Growth: Are Developing Countries Different?”, International Review of Applied Economics, 26 (6), pp. 735-753.

Razin O. and Collins S. (1997), “Real Exchange Rate Misalignments and Growth”, NBER Working Paper Series, n. 6174, Cambridge (MA): National Bureau of Economic Research.

Razmi A. (2021), “The real consequences of policy-driven exchange rate cycles: A stylized comparison of East Asia and Latin America”, The Manchester School, 90 (2), pp. 190-212.

Ribeiro R., McCombie J. and Lima G. (2020), “Does real exchange rate undervaluation really promote economic growth?”, Structural Change and Economic Dynamics, 52 (C), pp. 408-417.

Rodrik D. (2008), “The Real Exchange Rate and Economic Growth”, Brookings Papers on Economic Activity, 2008 (2), pp. 365-412.

Roodman D. (2009), “How to do xtabond2: An introduction to difference and system GMM in Stata”, The Stata Journal, 9 (1), pp. 86-136.

Ros J. (2015), Development Macroeconomics in Latin America and Mexico: Essays on Monetary, Exchange Rate, and Fiscal Policies, Basingstoke: Palgrave Macmillan.

Ros J. and Skott P. (1998), “Dynamics Effects of Trade Liberalization and Currency Overvaluation under Conditions of Increasing Returns”, The Manchester School, 66 (4), pp. 466-489.

Sachs J. (1985), “External Debt and Macroeconomic Performance in Latin America and East Asia”, Brookings Papers on Economic Activity, 1985 (2), pp. 523-573.

Schröder M. (2013), “Should Developing Countries Undervalue Their Currencies?”, Journal of Development Economics, 105, pp. 140-151.

Vaz P. and Baer W. (2014), “Real exchange rate and manufacturing growth in Latin America”, Latin American Economic Review, 23 (1), pp. 1-17.

Vieira F. and MacDonald R. (2012), “A Panel Data Investigation of Real Exchange Rate Misalignment and Growth”, Estudos Econômicos, 42 (3), pp. 433-456.

White G. and Wade R. (1988), “Developmental states and markets in East Asia: an introduction”, in White G. (ed.), Developmental States in East Asia (pp. 1-29), London: Palgrave Macmillan, pp. 1-29.

Williamson J. (1990), “What Washington Means by Policy Reform”, in Williamson J. (ed.), Latin American Adjustment: How Much Has Happened? (pp. 7-20), Washington (DC): Peterson Institute for International Economics.




How to Cite

Iasco-Pereira, H., & Missio, F. J. (2023). Would a competitive real exchange rate be a driver of economic prosperity?. PSL Quarterly Review, 75(303). https://doi.org/10.13133/2037-3643/17705