Saturday, 19 October 2019: 5:10 PM
There have been many studies analyzing the relationship between exchange rate misalignments and economic growth [for instance, Dornbusch (1988), Hausmann et al. (2005), Elbadawi et al. (2012), Zhang and Chen (2014), among others].
The adoption of New Technologies has changed the production and goods exchange process and additionally has extended the global services sector market, modifying the difference between tradable and non-tradable goods. In that sense, the well-known Balassa-Samuelson effect of international trade, that explains price differentials by differences in labour productivity, should be revisited to incorporate the effects of technologies transforming productivity, price differentials, exchange rate misalignments and economic growth.
Nevertheless, in this paper we estimate the relationship between per capita economic growth rate and the deviation from the equilibrium exchange rate considering grouped patterns of unobserved heterogeneity. In particular we allow clustered time patterns of unobserved heterogeneity common within each group of countries.
For this purpose, we use the EQCHANGE database created by Couharde et al. (2017) because it is the best database providing the equilibrium real exchange rate (ERER) and the corresponding currency misalignments for the largest sample of countries. A crucial novelty is detected in the second sub-database in which they use the behavioral equilibrium exchange rate (BEER) approach following Clark and MacDonald (1998) to estimate the ERER and the corresponding currency misalignments.
One of the important advantages of using the BEER procedure is that it does not require assumptions or to estimate the long run values of the economic fundamentals as needed in the macroeconomic balance approach. The BEER perspective, is based on the estimation of a long-run relationship between real exchange rates and their fundamentals to compute the equilibrium exchange rates. According to Thorstensen et al. (2014) this approach reduces subjectivity in the estimation of equilibrium exchange rates and consequently of misalignments by allowing the use of a set of fundamentals to explain the behavior of exchange rates. Therefore, we apply a linear panel data model for 121 countries during the 1996-2016 period and we estimate a multi-logit model to identify the main determinants (macroeconomic and institutional variables) of the per capita economic growth.
The adoption of New Technologies has changed the production and goods exchange process and additionally has extended the global services sector market, modifying the difference between tradable and non-tradable goods. In that sense, the well-known Balassa-Samuelson effect of international trade, that explains price differentials by differences in labour productivity, should be revisited to incorporate the effects of technologies transforming productivity, price differentials, exchange rate misalignments and economic growth.
Nevertheless, in this paper we estimate the relationship between per capita economic growth rate and the deviation from the equilibrium exchange rate considering grouped patterns of unobserved heterogeneity. In particular we allow clustered time patterns of unobserved heterogeneity common within each group of countries.
For this purpose, we use the EQCHANGE database created by Couharde et al. (2017) because it is the best database providing the equilibrium real exchange rate (ERER) and the corresponding currency misalignments for the largest sample of countries. A crucial novelty is detected in the second sub-database in which they use the behavioral equilibrium exchange rate (BEER) approach following Clark and MacDonald (1998) to estimate the ERER and the corresponding currency misalignments.
One of the important advantages of using the BEER procedure is that it does not require assumptions or to estimate the long run values of the economic fundamentals as needed in the macroeconomic balance approach. The BEER perspective, is based on the estimation of a long-run relationship between real exchange rates and their fundamentals to compute the equilibrium exchange rates. According to Thorstensen et al. (2014) this approach reduces subjectivity in the estimation of equilibrium exchange rates and consequently of misalignments by allowing the use of a set of fundamentals to explain the behavior of exchange rates. Therefore, we apply a linear panel data model for 121 countries during the 1996-2016 period and we estimate a multi-logit model to identify the main determinants (macroeconomic and institutional variables) of the per capita economic growth.