Does Exchange Rate Undervaluation Have a Symmetric or Asymme-tric Effect on Economic Growth?

Abstract

This paper investigates the asymmetric pass-through of real exchange rate undervaluation (Underval) on economic growth. The study using the autoregressive distributed lagged (ARDL) and non-linear autoregressive distributed lagged (NARDL) models reveals the complex and asymmetric effects of Underval on economic growth across different economies for the period 1984-2022. In developing countries, particularly those with floating exchange rate regimes, undervaluation can enhance economic performance by boosting exports and attracting foreign investment. However, in developing countries with fixed exchange rate regimes, undervaluation poses significant challenges and can lead to negative economic outcomes due to the rigidity and financial burdens associated with maintaining a fixed exchange rate. Conversely, developed countries and emerging markets exhibit a more muted response to underval, reflecting their greater economic stability and resilience. These findings highlight the importance of tailoring exchange rate policies to each country's specific economic context and exchange rate regime to optimize their impact on economic growth.