Real Exchange Rates, Saving and Growth : Is There a Link ?

The view that policies directed at the real exchange rate can have an important effect on economic growth has been gaining adherents in recent years. Unlike the traditional "misalignment" view that temporary departures of the real exchange rate from its equilibrium level harm growth by distorting a key relative price in the economy, the recent literature stresses the growth effects of the equilibrium real exchange rate itself, with the claim being that a depreciated equilibrium real exchange rate promotes economic growth. While there is no consensus on the precise channels through which this effect is generated, an increasingly common view in policy circles points to saving as the channel of transmission, with the claim that a depreciated real exchange rate raises the domestic saving rate -- which in turn stimulates growth by increasing the rate of capital accumulation. This paper offers a preliminary exploration of this claim. Drawing from standard analytical models, stylized facts on saving and real exchange rates, and existing empirical research on saving determinants, the paper assesses the link between the real exchange rate and saving. Overall, the conclusion is that saving is unlikely to provide the mechanism through which the real exchange rate affects growth.

Bibliographic Details

Main Authors:	Montiel, Peter J., Servén, Luis
Language:	English
Published:	World Bank, Washington, DC 2008-05
Subjects:	ADJUSTMENT COSTS, ADJUSTMENT PATH, AGGREGATE DEMAND, ASSETS, BALANCE OF PAYMENTS, BANK POLICY, BONDS, BUDGET CONSTRAINT, CAPITA INCOME, CAPITAL ACCUMULATION, CAPITAL FLOWS, CAPITAL GAINS, CAPITAL MOBILITY, CAPITAL STOCK, CENTRAL BANK, CENTRAL BANK POLICY, CONSUMER CREDIT, CONSUMPTION DEMAND, CONSUMPTION EXPENDITURE, CONSUMPTION EXPENDITURES, CONSUMPTION SMOOTHING, CORPORATE SAVING, CROSS-COUNTRY SAMPLE, CURRENT ACCOUNT, CURRENT ACCOUNT BALANCE, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT SURPLUSES, DEMOGRAPHIC, DEPENDENCY RATIOS, DEPRECIATIONS, DEVELOPING COUNTRIES, DEVELOPMENT ECONOMICS, DIVIDENDS, DOLLAR PRICE, DOLLAR PRICES, DOMESTIC CAPITAL, DOMESTIC COMPETITION, DOMESTIC DEMAND, DOMESTIC ECONOMY, DOMESTIC FINANCIAL SYSTEM, DOMESTIC INFLATION, DOMESTIC MARKETS, DOMESTIC SAVING, DUTCH DISEASE, ECONOMETRIC EVIDENCE, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC POLICY, ECONOMIC REVIEW, EMPIRICAL EVIDENCE, EMPIRICAL STUDIES, ENDOGENOUS VARIABLE, ENDOGENOUS VARIABLES, EQUILIBRIUM, EQUILIBRIUM LEVEL, EQUILIBRIUM VALUE, EQUILIBRIUM VALUES, EXCESS SUPPLY, EXCHANGE RATE DEPRECIATION, EXCHANGE RATE INCREASES, EXCHANGE RATE POLICIES, EXCHANGE RATE POLICY, EXCHANGE RATE SYSTEM, EXCHANGE RATE TARGET, EXCHANGE RATE TARGETING, EXCHANGE RATE TARGETS, EXOGENOUS SHOCKS, EXOGENOUS VARIABLES, EXPENDITURE INCREASES, EXPLANATORY VARIABLES, EXTERNAL BALANCE, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCIAL DEVELOPMENT, FINANCIAL INSTITUTION, FINANCIAL MARKETS, FINANCIAL REFORM, FINANCIAL SAVING, FINANCIAL SECTOR, FINANCIAL SECTOR STABILITY, FINANCIAL STRUCTURE, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FINANCIALLY OPEN ECONOMIES, FISCAL POLICIES, FISCAL POLICY, FIXED EFFECT, FIXED EXCHANGE RATE, FLEXIBLE RATE, FOREIGN FINANCING, FORMAL FINANCIAL SECTOR, FUTURE GROWTH, GLOBALIZATION, GROWTH PERFORMANCE, GROWTH RATE, GROWTH RATE OF INCOME, GROWTH RATES, HIGH INFLATION, HOLDING, HOLDINGS, HOUSEHOLD INCOME, HOUSEHOLD SAVING, HOUSEHOLD SAVING RATE, IMPORT, IMPORT PROTECTION, INCOME DISTRIBUTION, INCOME LEVEL, INCOME LEVELS, INCOMES, INDUSTRIAL COUNTRIES, INFLATION RATE, INSTRUMENT, INSURANCE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL BORROWING, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL FLOWS, INTERNATIONAL ECONOMICS, INTERNATIONAL EXPERIENCE, INTERNATIONAL FINANCIAL MARKETS, INTERNATIONAL INVESTMENT, INTERNATIONAL MONETARY FUND, INVESTMENT RATES, LEVY, LIQUIDITY, LIQUIDITY CONSTRAINTS, LONG-RUN GROWTH, MACRO STABILITY, MACROECONOMIC ANALYSIS, MACROECONOMIC ENVIRONMENT, MACROECONOMIC IMPACT, MACROECONOMIC MANAGEMENT, MACROECONOMIC PERFORMANCE, MISALIGNMENT, NATIONAL SAVING, NOMINAL EXCHANGE RATE, NPL, OLD AGE CRISIS, OPEN ECONOMIES, OPEN ECONOMY, OPEN-ECONOMY MACROECONOMIC MODELS, OPPORTUNITY COST, OUTPUT, OVERVALUATION, PENSION, PERMANENT REAL DEPRECIATION, POLICY RESEARCH, POSTAL SAVING, PRIVATE CONSUMPTION, PRIVATE SAVING, PROVIDENT FUND, PROVIDENT FUNDS, PUBLIC ECONOMICS, PUBLIC POLICY, PUBLIC SAVING, PUBLIC SECTOR, RAPID GROWTH, RATE OF DEPRECIATION, RATE OF GROWTH, RATE OF INFLATION, RATE OF INVESTMENT, RATE TARGETING, REAL APPRECIATION, REAL DEPRECIATION, REAL EXCHANGE, REAL EXCHANGE RATE, REAL EXCHANGE RATE MISALIGNMENT, REAL EXCHANGE RATE MISALIGNMENTS, REAL EXCHANGE RATE VOLATILITY, REAL EXCHANGE RATES, REAL INTEREST, REAL INTEREST RATE, REAL INTEREST RATES, REAL WAGES, RELATIVE PRICE, RESTRICTIONS ON ENTRY, RETURN, RISK PREMIUM, SAVING RATES, SAVINGS, SAVINGS RATES, SCATTER PLOT, SEIGNORAGE, SMALL SAVERS, STABLE INFLATION, STEADY STATE, SUB-SAHARAN AFRICA, SURPLUS, SUSTAINED GROWTH, TAX, TAX INCENTIVES, TRADE BALANCE, TRADING, TRADING PARTNERS, TRANSACTION, TRANSACTION COSTS, TRANSACTIONS COSTS, TRANSITION PATH, UNCERTAINTY, WORLD INTEREST RATE,
Online Access:	http://documents.worldbank.org/curated/en/2008/05/9474401/real-exchange-rates-saving-growth-link https://hdl.handle.net/10986/6698
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