Bussirère, Matthieu and Lopez, Claude and Tille, Cédric (2013): Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth?
Preview |
PDF
MPRA_paper_44053.pdf Download (890kB) | Preview |
Abstract
While currency crises have been extensively studied, the opposite phenomenon, large appreciations, has been far less researched. We fill this gap by providing an empirical exploration of historical episodes of large real exchange rate appreciations, using a sample of 28 advanced and 25 emerging market economies, with annual data going back to 1970. We focus on the impact of large appreciations on output growth. Our first finding is that countries experiencing large real exchange rate appreciations display distinct patterns: large appreciations significantly lower export growth and boost import growth on impact. Strikingly, however, output growth is higher, on average, despite the adverse impact on exports. Our second finding is that these aggregate numbers hide substantial heterogeneity, which we link to the nature of the shocks that cause the appreciation. In particular, appreciations associated with so-called “capital flow bonanzas” have a marked downward effect on growth. This pattern is consistent with the insights from a simple model that contrasts the impact of productivity shocks with that of capital inflows shocks. Higher productivity in the traded sector leads to a boom in traded output and a current account surplus, while higher foreign lending leads to a boom in non-traded output and an external deficit as traded output falls and consumption increases.
Item Type: | MPRA Paper |
---|---|
Original Title: | Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth? |
Language: | English |
Keywords: | exchange rate, currency crises, endaka, international trade, international capital flows, lending booms, small open economy macroeconomics |
Subjects: | F - International Economics > F1 - Trade > F10 - General F - International Economics > F3 - International Finance > F30 - General F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics |
Item ID: | 44053 |
Depositing User: | Claude Lopez |
Date Deposited: | 29 Jan 2013 13:31 |
Last Modified: | 27 Sep 2019 13:36 |
References: | Benigno, P., and F. Romei (2012), “Debt Deleveraging and the Exchange Rate”, NBER Working Paper No. 17944. Berg, A. and C. Pattillo (1999), “Predicting Currency Crises: The Indicators Approach and an Alternative”, Journal of International Money and Finance; 18(4), August 1999, pp. 561-86. Bussière, M. and M. Fratzscher (2006), “Towards a New Early Warning System of Financial Crises”, Journal of International Money and Finance, 25(6), October 2006, pp. 953-973. Bussière, M., M. Ca’Zorzi, A. Chudik and A. Dieppe (2010), “Methodological Advances in the Assessment of Currency Misalignments”, ECB Working Paper No. 1151, January 2010. Bussière, M., S. Saxena and C. Tovar (2012), “Chronicle of Large Currency Devaluations: Re-Examining the Effects on Output”, Journal of International Money and Finance, Volume 31, Issue 4, June 2012, pp. 680–708. Calvo, G. A. and C. M. Reinhart (2002), “Fear Of Floating,” The Quarterly Journal of Economics, MIT Press, vol. 117(2), pp. 379-408, May. Cerra, V. and S. Saxena (2008), “Growth Dynamics: The Myth of Economic Recovery”, The American Economic Review, Vol. 98, No. 1, pp 439-457. Easterly, W. (2005), ”National policies and economic growth” in Philippe Aghion and Steven Durlauf, editors, Handbook of Economic Growth, Elsevier, 2005. Eichengreen, B., A. Rose and C. Wyplosz (1995), “Exchange Market Mayhem: The Antecedents and Aftermaths of Speculative Attacks”, Economic Policy, 21, pp. 249-312. Frankel, J. and A. Rose (1996), “Currency Crashes in emerging Markets: an Empirical Treatment”, Journal of International Economics, 41, pp. 351-66. Goldstein, M., and C. M. Reinhart (2000), “Assessing Financial Vulnerability: An Early Warning System for Emerging Markets,” Peterson Institute Press: All Books, Peterson Institute for International Economics, number 100, January. Gourinchas, P.-O., R. Valdes and O. Landerretche. "Lending Booms : Latin America and the World." Economia 1, 2 (2001). Johnson, S. H., J. Ostry, and A. Subramanian (2007), "The Prospects for Sustained Growth in Africa: Benchmarking the Constraints", March 2007, IMF Working Paper No. 07/52. Kaminsky, G., S. Lizondo and C. M. Reinhart (1998), “Leading Indicators of Currency Crises,” IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pp. 1-48, March. Kappler, M., H. Reisen, M. Schularick, and E. Turkisch, E. (2012), “The Macroeconomic Effects of Large Exchange Rate Appreciations”, Open Economies Review, DOI 10.1007/s11079-012-9246-4. Krugman, P. (1994), “Competitiveness: a Dangerous Obsession”, Foreign Affairs, Issue: March/April 1994 (volume 73, number 2). Obstfeld, M., and K. Rogoff (1996). Foundation of International Macroeconomic, Princeton University Press. Razin, O. and S. M. Collins (1997), ”Real Exchange Rate Misalignments and Growth,” Georgetown University, 1997. Reinhart, C. M. and V. R. Reinhart (2008), “Capital Flow Bonanzas: An Encompassing View of the Past and Present”, NBER Working Paper No. 14321, Issued in September 2008. Rodrik, D. (2008), “The Real Exchange Rate and Economic Growth: Theory and Evidence”, Brookings Papers on Economic Activity, Fall 2008, pp. 365-412. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/44053 |
Available Versions of this Item
- Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth? (deposited 29 Jan 2013 13:31) [Currently Displayed]