Cheaper currencies and long-term growth: The effect of exchange rate management and capital controls

Abstract

© 2020 John Wiley & Sons Ltd In this paper, we test whether weakening the domestic currency can help boost economic growth. To estimate this policy-relevant but yet complex link, we apply a new mediation analysis to isolate the long-term growth effects of currency undervaluation induced by active exchange rate management and capital control policies. Using a dataset of 182 countries in the post-Bretton-Woods period, we find that changes in undervaluation driven by exchange rate management and capital control policies have no significant impact on long-term growth. In addition, the direct growth effects of these policies are typically negative and offset the small positive impact gained indirectly through increased currency undervaluation.