Exchange rate misalignment and economic growth

Abstract

This paper study the relation of RER misalignments for three southern countries and for three northern countries, obtaining the misalignments from a VEC model. Concluding that misalignments are bigger in the northern countries with one exception. The next step done is through a basic equation of economic growth do a similar VEC model, later with impulse response analyses the effect of misalignments in economy activity for each country. The result are positive effects in southern countries with the exception of Spain and negative for northern with the exception of Denmark. Finally mixing the two results the results are not clear because are contradictory results and is not possible say if undervalued exchange rate is good o bad. Anyways, concluding, the misalignments affect the economy activity and it is growth for each country so exchange rate becomes an important instrument to consider for the countries.