That is why episodes of undervaluation are strongly associated with more rapid economic growth.
Are my quantitative estimates of the growth effects of undervaluation plausible?
Even though these authors focus on the costs of overvaluation rather than the benefits of undervaluation, their concern with the real exchange rate renders their paper complementary to this one.
Maintaining a real undervaluation requires either higher saving relative to investment or lower expenditure relative to income.
Table 10 presents some systematic evidence on how policy choices feed into the real exchange rate and undervaluation.
As expected, positive terms of trade shocks are bad for undervaluation.
Finally, the level of inflation does not have a strong association with undervaluation, indicating that undervaluation need not come at the cost of inflation.
Real undervaluation is equivalent to a production subsidy plus a consumption tax on tradables.
Exchange Rate Undervaluation and Economic Growth: Diaz Alejandro (1965) Revisited.
The second message provides a theoretical explanation for the first: developing countries that systematically undervalue grow faster because undervaluation raises the rate of return to capital employed in the production of tradable goods by an amount sufficient to overcome the wide range of institutional problems that disproportionately affect that sector of the economy.
The paper contains a lot of fertile ground for a discussant: measurement issues, modeling assumptions, and implications of undervaluation for inflation and monetary policy, to name a few.
A 50 percent undervaluation is associated with a five-year growth rate that is about 1.