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The Real Exchange Rate and Growth in Latin America

This paper provides evidence on the role played by the real exchange rate in the growth process of emerging economies. The empirical analysis is conducted on a panel dataset of Latin-American countries over the period 1970-2010. We find keeping an undervalued real exchange rate is conducive to higher growth, at least in Granger-causality terms. In addition, we demonstrate how using standard fixed effects and mean-group estimators may lead to misleading inference, in particular on the role of the Balassa-Samuelson effect, because the appropriate estimation strategy should control for both parameter heterogeneity and cross-section dependence. These findings are independent of the particular estimator used, as well as additional regressors employed in the growth literature, or direct measures of the real exchange rate.