THE REAL EXCHANGE RATE MISALIGNMENT AND ECONOMIC PERFORMANCE IN EAST ASIAN ECONOMIES

Author: Dai Pham

Pham, Dai, 2015 THE REAL EXCHANGE RATE MISALIGNMENT AND ECONOMIC PERFORMANCE IN EAST ASIAN ECONOMIES, Flinders University, Flinders Business School

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Abstract

This thesis investigates the effect of the real exchange rate (RER) misalignment on economic growth in East Asian economies. It has two main components. The first part offers a theoretical two-sector small open economy model and theoretically explains for the investment channel through which undervaluation could promote economic growth. The finding is that a depreciation i n the RER results in higher steady state levels of capital stock and investment. Moreover, a depreciation in the RER increases the optimal investment rate associated with any initial capital stock. In the second part, data collected from nine East Asian economies over the recent three decades are used to test various hypotheses on the channels through which the RER misalignment could affect econ omic growth in developing countries. The RER misalignment is estimated by the reducedequation approach, using alternative price indices. Estimated indicators of the RER misalignment are found to be highly correlated to each other, especially between indices derived from the same method or price index. The first empirical model examines the role of financial integration in determining the nexus between the RER misalignment and economic growth. The interaction between the RER misalignment and financial integration is investigated in a typical growth model. The panel-corrected standard error estimator is employed. It finds that the RER misalignment and economic growth relationship is statistically significant and that the growth-enhancing effect of undervaluation is strengthened by a lower degree of financial integration. This finding implies that a less financially integrated economy could benefit ed more from a competitive exchange rate than a highly financially integrated economy. The second empirical model tests the hypothesis on the linkage between the RER misalignment and productivity. Total factor productivity (TFP) is estimated by two alternative methods, growth accounting and data envelopment analysis (DEA). It finds significant evidence to support that a depreciated RER could promote TFP growth. Moreover, the effect of the RER misalignment on TFP growth is found to be sizable.

Keywords: Real exchange rate misalignment; Productivity; Economic growth: Financial integration; Intertemporal analysis
Subject: Business thesis

Thesis type: Doctor of Philosophy
Completed: 2015
School: Flinders Business School
Supervisor: Professor Sarath Delpachitra