Can the real exchange rate play a role in boosting economic growth in developing countries?
In most developing countries the real exchange rate is manipulated to various degrees and is largely determined by economic policies rather than market fluctuations. Governments have a variety of policy instruments available to achieve a competitive real exchange rate, and, potentially, real undervaluation. Examples include a moderate fiscal consolidation in the presence of a low level of private absorption; the introduction of capital controls on capital inflows and the liberalisation of capital outflows; targeted interventions on foreign exchange markets; and a nominal depreciation associated with anti-inflationary policies such as price and wage moderation. Empirical evidence shows that real exchange rate variations can indeed affect growth outcomes. Rodrik (2009) argues that real undervaluation promotes economic growth, increases the profitability of the tradable sector, and leads to an expansion of the share of tradables in domestic value added. The expansion of the tradable secto
