Undervaluation，Financial Development and Economic Growth
Read
DownLoad |
| Title | Undervaluation，Financial Development and Economic Growth
|
| Author | Wang Yaqi and Zou Jingxian |
| Organization | Central University of Finance and Economics, Peking University |
| Email | yakisunny@126.com；zoujingxian@gmail.com |
| Key Words | Undervaluation； Financial Development； Economic Growth |
| Abstract | This paper analyzes the effect of exchange rate undervaluation on economic growth in the presence of borrowing constraint. Based on a two-sector small open economy model, it’s shown that undervaluation can promote economic growth by partly correcting the distortion in financial market, through the channels of increasing the within-sector productivity and relative share of tradable sector, meanwhile such effect gets magnified with tighter borrowing constraint. We empirically test the theoretical conclusions using cross-country data from 1980-2011. On average, for countries whose financial development falling below 25% of the sample, a 50% undervaluation can boost economic growth rate by 0.15 percentage points, mainly through the productivity increase in the tradable sector. Moreover, such effect gets an extra 0.075 percentage points increase with a 10% drop in financial development. |
| Serial Number | WP977 |
| Time | 2015-12-09 |
|