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Currency misalignments and economic growth: the foreign currency-denominated debt channel

Author

Listed:
  • Carl Grekou

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract
The literature on the growth effects of currency misalignments, although prolific, revolves around two main axes: one the one hand, the export-oriented growth literature which attributes positive effects to undervaluations (competitiveness gains) and, on the other hand, the Washington Consensus view according to which any deviations from equilibrium hamper economic growth. In this paper, we show that there is no "one size fits all" relationship in this regard. Indeed, relying on a panel of 72 developing and emerging countries, we evidence the existence of a foreign currency-denominated debt channel through which misalignments impact growth. Compared to the "traditional" competitiveness channel, this channel works in the opposite direction. The paper therefore reconciles the two strands of the literature: undervaluations may have indeed a positive growth effect, but it is crucial to take into account the possible costs related to this undervaluation to have a clearer picture of the net total effect.

Suggested Citation

  • Carl Grekou, 2015. "Currency misalignments and economic growth: the foreign currency-denominated debt channel," Working Papers hal-04141399, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141399
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141399
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    References listed on IDEAS

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