Does an undervalued currency merit economic growth?: Evidence from Taiwan

Panoeconomicus

关键词: undervaluation;    exchange rate misalignment;    net foreign assets;    terms of trade;    Granger causality;   

DOI  :  10.2298/PAN1201037Y

来源: DOAJ

【 摘 要 】

Whether an undervalued currency is an attainable industrial policy fordeveloping countries’ sustained development has recently invoked manydiscussions. This paper studies the case of Taiwan after first determiningthe misalignment of Taiwan’s currency by estimating the fundamentalequilibrium real exchange rate. Three sub-periods for Taiwan’s currencyexchange rate misalignment are identified: undervaluation in the periods1981-1986 and 1998- 2008 and overvaluation during 1987-1997. Second, we use avector autoregression (VAR) model to examine the Granger causality betweenexchange rate misalignment and GDP, by incorporating export and investmentvariables. The evidence shows that exchange rate misalignment does Grangercause GDP and it mainly comes from the third sub-period when the Taiwandollar was undervalued. From past experience and the current economicdoldrums of the last resort of global exports - the United States - currencyundervaluation is not a validated strategy upon which emerging markets canwishfully impinge.

【 授权许可】

Unknown