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Cambridge Journal of Economics Advance Access published online on November 22, 2007
Cambridge Journal of Economics, doi:10.1093/cje/bem042
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© The Author 2007. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Real exchange rate levels and economic development: theoretical analysis and econometric evidence

Paulo Gala*

* Sao Paulo School of Economics

Address for correspondence: Paulo Gala, Sao Paulo School of Economics, Getulio Vargas Foundation, Rua Itapeva 474, 13o andar, Sao Paulo, Brazil, 01332-000; email: pgala{at}fgvsp.br

According to the development approach to exchange rates, competitive currencies have been a key factor in most East and Southeast Asian successful growth strategies. There is also today an important empirical literature that relates overvaluations to low per capita growth rates. While the econometric literature on this issue is relatively rich, theoretical analysis of channels through which real exchange rate levels could affect economic development are very scarce. This paper intends to contribute to the debate by bringing more theoretical elements and providing new econometric evidence to the connections between real exchange rate levels and development.

Key Words: Overvaluations • Undervaluations • Economic development

JEL classifications:: F3, F4, O2

Manuscript received February 26, 2007; final version received September 26, 2007.


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