The impact of real exchange rates adjustments on global imbalances: A multilateral approach

An extensive literature stresses that currency misalignments are costly in terms of growth performance. However, these studies do not consider the direct and indirect effects of currency misalignments on other countries. In this paper, we analyze how misalignments of the dollar, the euro, and the re...

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Bibliographic Details
Published in:Economic modelling 2014-02, Vol.37, p.149-163
Main Authors: Allegret, Jean-Pierre, Sallenave, Audrey
Format: Article
Language:English
Subjects:
Currencies
Economic growth
Economic models
Economic performance
Economic theory
Economics and Finance
Exchange rates
Foreign exchange rates
Global economy
Growth
GVAR
Humanities and Social Sciences
International trade
Manycountries
Misalignments
Modelling
Studies
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Summary:An extensive literature stresses that currency misalignments are costly in terms of growth performance. However, these studies do not consider the direct and indirect effects of currency misalignments on other countries. In this paper, we analyze how misalignments of the dollar, the euro, and the renminbi affect their respective economies and those of their trading partners using a multi-country dataset GVAR model. Our model includes 15 advanced and emerging countries and uses quarterly data spanning the period 1980–2010. We find that misalignments significantly influence the world economy. We show that overvaluation and undervaluation shocks do not produce the same effects. •We find that misalignments significantly influence the world economy. exchange rate adjustment matter to reduce global imbalances, our findings suggest that we must not wait too much about the magnitude of this influence.•We show that overvaluation and undervaluation shocks do not produce the same effects. One of our striking results is the fact that the renminbi undervaluation (overvaluation) exerts a contractionary (expansionary) impact on world growth.
ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2013.10.022