In this paper, we test whether weakening the domestic currency can help boost economic growth. To estimate this policy-relevant but yet complex link, we apply a new mediation analysis to isolate the long-term growth effects of currency undervaluation induced by active exchange rate management and capital control policies. Using a dataset of 182 countries in the post-Bretton-Woods period, we find that changes in undervaluation driven by exchange rate management and capital control policies have no significant impact on long-term growth. In addition, the direct growth effects of these policies are typically negative and offset the small positive impact gained indirectly through increased currency undervaluation.
|Number of pages||2757|
|Publication status||Accepted/In press - 17 Dec 2020|
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