Does real exchange rate undervaluation really promote economic growth

A significant proportion of critical agri-food literature has, to date, focused on the uneven relations of power between the Global North and the Global South, and the neoliberal characteristics of...

Chinese state capitalism and neomercantilism in the contemporary food regime: contradictions, continuity and change

This paper offers a systematic survey of recent research evaluating the impact of the level and volatility of the real exchange rate (RER) on economic growth. Existing empirical work finds a positive association between RER levels and economic growth, especially in developing countries. This relationship appears to be driven by cases of overvaluation hurting and undervaluation favoring growth. RER volatility, in turn, has a negative impact on growth. Together with the review of the literature, panel growth regressions with the 9.0 version of the Penn World Table database are carried out to evaluate previous findings. The paper also surveys the literature studying the mechanisms that explain the positive growth effect of the RER. One of them emphasizes that an undervalued RER reduces macroeconomic volatility, favoring capital accumulation and growth. Another one stresses that a competitive RER stimulates capital accumulation in modern tradable activities, facilitating structural change and economic development.

The Real Exchange Rate and Economic Growth: A Survey

Time-varying impact of oil shocks on trade balances: Evidence using the TVP-VAR model

How China Grows: Investment, Finance, and Reform, by James Riedel, Jing Jin and Jian Gao. Princeton: Princeton University Press, 2007. xiv + 208 pp. US$39.95/ £23.95 (hardcover). China's economy has grown at an average rate of roughly 10 per cent annually since the economic reform initiated in late 1978. What are the sources contributing to this economic growth, and is it sustainable? These are the two main questions asked, analyzed and answered in this book. Two major themes are pursued. The first theme is that investment is not only the engine of economic growth in China but also the main source of technological progress, productivity growth and structural change. In developing this argument, James Riedel, Jing Jin and Jian Gao provide in Chapter 1 a brief review of China's economic reforms and their outcomes in the four economic sectors agriculture, industry, foreign trade and finance. They conclude that the financial sector is the weakest and the most crucial for sustaining growth in the future. In Chapter 2, reviewing recent studies of China's growth, Riedel, Jin and Gao find that these have not been able to explain economic growth in China, because they do not consider independent technological improvement over the past two decades. The authors therefore challenge conventional growth theory, and argue that the function of investment is not just to replace obsolete capital but more importantly to upgrade technology in the economy: technological change and investment are part and parcel of the same thing. Changing technology requires investment, and investment inevitably involves technological change. As a result, investment not only drives China's economic growth but is also the main source of technological progress, productivity growth and structural change. This argument is probably the book's most valuable contribution; it also serves as the foundation for the discussion of issues in Chinese financial sector in the rest of the book. The second theme is that the key to sustaining long-term growth in China is financial sector liberalization and development. In developing this argument, Riedel, Jin and Gao devote Chapters 3 to 7 to analyzing the role of the financial sector in financing investment and the reforms that are needed to improve the functioning of banking institutions and financial markets. Chapter 3 examines the sources of saving in the Chinese economy and assesses whether and to what extent they are sufficient in quantity and allocated with sufficient efficiency across alternative investment opportunities to sustain growth in the future. …

How China Grows: Investment, Finance, and Reform

Papua New Guinea's (PNG) resource boom has come to an end. Theory suggests that the real exchange rate (RER) should subsequently depreciate in order to restore internal and external balance. In practice, however, the imposition of foreign exchange controls has led to a large backlog in foreign currency orders suggesting that the RER is significantly overvalued. The purpose of this paper is to inform the ongoing policy debate surrounding this issue by estimating the extent to which PNG's RER is currently misaligned. Our results suggest that the kina should depreciate by about 20% to close the gap between the actual and equilibrium value of the RER. Otherwise PNG is likely to pay high economic costs as real overvaluation sustained through foreign exchange restrictions led to resource misallocation, lower economic growth, black markets, and ultimately a balance of payments crisis in many other developing countries in the past.

/pdf/after-papua-new-guinea-s-resource-boom-is-the-kina-pa3ctlrvm5.pdf

After Papua New Guinea's Resource Boom: Is the Kina Overvalued?

In theory, valuation effects (changes in net external assets of a country arising from movements in exchange rates or asset returns) are an important channel of international risk sharing as they facilitate external adjustment. However, the effects can also be economically destabilizing in the presence of frictions in the international financial system. Despite the growing significance of valuation effects in an era of financial globalization, the nature and extent of their macroeconomic effect has not yet been systematically examined, especially in relation to emerging market economies (EMEs). The study examines the macroeconomic impact of valuation effects for 53 countries from 1980–2010. Valuation effects seem to operate as a risk sharing channel in high income countries. For EMEs the results depend on how valuation effects correlate with domestic consumption growth. There is weak evidence that valuation effects act as a risk sharing channel only if the correlation is negative, and are destabilizing otherwise.

Valuation effects, risk sharing, and consumption smoothing

Papua New Guinea’s (PNG) resource boom has come to an end. Theory suggests that the real exchange rate (RER) should subsequently depreciate in order to restore internal and external balance. In practice, however, the imposition of foreign exchange controls has led to a large backlog in foreign currency orders suggesting that the RER is significantly overvalued. The purpose of this paper is to inform the ongoing policy debate surrounding this issue by estimating the extent to which PNG’s RER is currently misaligned. Our results suggest that the kina should depreciate by about 20% to close the gap between the actual and equilibrium value of the RER. Otherwise PNG is likely to pay high economic costs as real overvaluation sustained through foreign exchange restrictions led to resource misallocation, lower economic growth, black markets, and ultimately a balance of payments crisis in many other developing countries in the past.

/pdf/after-papua-new-guinea-s-resource-boom-is-the-kina-4vv9fcvunz.pdf

The working paper examines how government take, which is the ratio of fiscal resource revenue to resource output, is an important determinant of internal and external balance in resource-rich developing countries (RRDCs). In the study, a simple theoretical model of internal and external balance incorporates the key features of RRDCs. It predicts that a fall in government take depreciates the equilibrium real exchange rate and lowers equilibrium absorption. The study looks into the need for RRDCs to convert vast natural resources into sustainable economic development, considering the impact of macroeconomic instability due to recurrent commodity boom-and-bust cycles.

/pdf/a-simple-model-of-internal-and-external-balance-for-resource-282328ss.pdf

A Simple Model of Internal and External Balance for Resource-Rich Developing Countries

This paper recommends an immediate and frontloaded exchange rate depreciation that can encourage an adjustment process to address the foreign exchange shortage in Papua New Guinea. Due to a shortage in foreign exchange (forex) since 2015, the central bank of Papua New Guinea rationed forex that led to a large backlog of orders and import compression. The study finds that the policy proposals discussed in the country are inadequate to restore currency convertibility, based on surveys of the forex market structure and analysis of recent market conditions. It recommends more exchange rate flexibility and forex allocation through competitive auctions over the medium term.

/pdf/the-path-to-kina-convertibility-an-analysis-of-papua-new-3tp44rnh.pdf

The Path to Kina Convertibility: An Analysis of Papua New Guinea’s Foreign Exchange Market

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After Papua New Guinea's Resource Boom: Is the Kina Overvalued?

Valuation effects, risk sharing, and consumption smoothing

After Papua New Guinea's Resource Boom: Is the Kina Overvalued?

A Simple Model of Internal and External Balance for Resource-Rich Developing Countries

The Path to Kina Convertibility: An Analysis of Papua New Guinea’s Foreign Exchange Market