The Real Exchange Rate and Economic Growth: Theory and Evidence

I provide evidence that undervaluation (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries,suggesting that tradable goods suffer disproportionately from the distortionsthat keep poor countries from converging. I present two categories of explanations as to why this may be so, focusing on (a) institutional/contractualweaknesses, and (b) market failures. A formal model elucidates the linkagesbetween the level of the real exchange rate and the rate of economic growth.