Real Exchange Rate Misalignments And Economic Growth

As an essential relative variable in an open economy,the real exchange rate is a bridge linking the domestic economy with the external economy.The equilibrium exchange rate refers to the real exchange rate under which the domestic and foreign macroeconomics reach equilibrium level at the same time.When the real exchange rate deviates from the equilibrium exchange rate,the real exchange rate misalignment occurs.Real exchange rate is also an important indicator to measure a country's international competitiveness,so it makes sense for economic growth.The traditional view supports that the real exchange rate misalginments,regardless of undervaluation or overvaluation is not conducive to economic growth,but since 2008 when Rodrik put forward the point of view that appropriate monetary undervaluation can significantly promote economic growth,exchange rate misalignments and economic growth has become a hot topic in recent years,there began to emerge a large number of related researches in domestic and foreign academic community.But the real exchange rate misalignment can be classified into two types-exchange rate undervaluation and exchange rate overvaluation,the direction and intensity of they affect economic growth are not yet unified in conclusion.In recent years,due to the dual pressures of the internal and external economy,the RMB exchange rate policy has been challenged more and more,and the equilibrium level of the RMB exchange rate has gradually become the focus of attention at home and abroad.This paper will take the equilibrium real exchange rate as the starting point,first examing the real exchange rate misalignment and economic growth using world annual panel data,and then transferred to the individual perspective-study of the RMB real exchange rate imbalance and Chinese economic growth.The significances of this paper are as follows:The research of this paper enriches the current research about the theory of exchange rate misalignment,and is helpful to understand the real exchange rate more comprehensively.Using the model of behavioral equilibrium exchange rate to study the equilibrium level of real exchange rate will help people to establish a more realistic understanding of the real exchange rate level,while using of economic growth model to examine the specific role which the real exchange rate misalignments played on economic growth,including the overall performance of the world and individual performance.The role of the real exchange rate undervaluation plays on economic growth is still in the exploration of an immature stage.At present,domestic scholars rarely use the world panel data to study the effect of real exchange rate misalignment on economic growth,most of them focus on the calculation of misalignment of RMB real exchange rate or a simple study on the economic effects of the misalignment to the real exchange rate of the RMB,and rarely specializes in the effects of real exchange rate undervaluation and overvaluation on economic growth.This paper elaborates and summarizes the main theoretical mechanism of the effect of real exchange rate misalignment on economic growth so as to provide the theoretical basis for empirical results.The transmission mechanism can be summarized as four kinds,namely,"current account mechanism","capital accumulation mechanism","total factor productivity improvement mechanism" and "suboptimal adjustment mechanism".In the empirical part,based on panel data of 94 countries from 1970 to 2014,the effects of real exchange rate misalignment on economic growth are quantitatively analyzed.The study found that the real exchange rate misalignment has a significant inhibitory effect on economic growth according to the regression results of world panel data,when the real exchange rate misalignment index rise by one percentage point,on average it will lead to a decline in economic growth rate of 0.02-0.03 percentage point,and currency undervaluation promotes economic growth,while currency overvaluation inhibits economic growth.In addition,the comparison also found that the negative effect of long-term real exchange rate misalignment in developed countries is greater than that of developing countries.The lagged one of the real exchange rate misalignment also has adverse effects on economic growth.With the deepening of the research,more empirical evidences show that the different situations of the real exchange rate misalignments are asymmetric to the economic growth.Then,the next part studies the effect of real exchange rate misalignments on economic growth from the perspective of individual effect with the help of behavior equilibrium exchange rate model and cointegration method,based on the data of China from the first quarter of 1994 to the fourth quarter of 2014.We conclude that the misalignment of RMB real exchange rate is inversely related to China's economic growth,which is in accordance with the results of previous studies using world-wide data.Specifically,the average one percent increase in the RMB misalignment will bring about 0.18%decline for Chinese GDP growth rate with the other conditions remain unchanged;continue to examine the asymmetric effects of real exchange rate undervaluation and overvaluation on economic growth,the study found that the undervaluation of the RMB to a certain extent,can promote China's economic growth,and the overvaluation of the yuan has the opposite effect.In the robustness test,China's exchange rate reform factor is also taken into account,the new discovery is that the negative effect of the real exchange rate imbalance on economic growth after the exchange rate reform is more obvious.According to the empirical research results,we can obtain a conclusion:for any country,long-term,sustained and severe exchange rate misalignments will bring losses to the economy and development.Appropriate currency undervaluation is conducive to economic growth,while avoiding exchange rate overvaluation is also important.In the case of RMB,it is recommended that the Chinese government and monetary authorities implement relevant measures to increase the flexibility of the RMB exchange rate and to avoid the negative effects of exchange rate overvaluation on the constant growth,China should also accelerate the transformation of economic growth model in order to maintain the vitality of economic growth.