A Panel Data Investigation of Real Exchange Rate Misalignment and Growth

The paper investigates the role of real exchange rate misalignment on long-run growth for a set of ninety countries using time series data from 1980 to 2004. We first estimate a panel data model (using fixed and random effects) for the real exchange rate, with different model specification, in order to produce estimates of the equilibrium real exchange rate and this is then used to construct our measures of real exchange rate misalignment. We also provide an alternative set of estimates of real exchange rate misalignment using panel cointegration methods. The variables used in our real exchange rate models are: real per capita GDP; net foreign assets; terms of trade and government consumption. The results for the two-step System GMM panel growth models indicate that the coefficients for real exchange rate misalignment are positive for different model specification and samples, which means that a more depreciated (appreciated) real exchange rate helps (harms) long-run growth. The estimated coefficients are higher for developing and emerging countries. Key-Words: Long-run Economic Growth; Real Exchange Rate Misalignment; Panel Data Analysis and System GMM. JEL Code: F31, O47, C33 ‡ Instituto de Economia, Universidade Federal de Uberlândia and Visiting Scholar, Department of Economics – University of Glasgow. Financial Support for this Research was provided by CAPES, Ministry of Education, Brazil. Email: [email protected] and [email protected] † Adam Smith Chair of Political Economy, Department of Economics University of Glasgow.