CARL GREKOU

Reconciling contrasting views on the growth effect of currency undervaluations

Cécile Couharde, Carl Grekou, Valérie Mignon, Florian Morvillier

Abstract

This paper provides an in-depth analysis of the link between exchange rate misalignments and economic growth for a large sample of 170 countries over the 1973-2019 period. We rely on new cross-country data on multilateral currency misalignments and cross-quantile regressions to demonstrate that the seemingly divergent views of the Washington Consensus and the export-led growth theory on the role of currency undervaluations in promoting economic growth can be reconciled. Although any significant departures from the equilibrium exchange rate levels are found undesirable, we show that undervaluations are more likely to stimulate economic growth in developing countries. However, this positive impact is observed only up to certain thresholds of development level and currency undervaluation. Consequently, strategies in the poorest countries that systematically undervalue currencies in real terms to foster growth should be carefully tailored, as they raise the risk for these economies of switching from a positive to a less favorable growth regime, depending on both their specific wealth level and the extent of their currency undervaluation.

Mot(s) clé(s)

Cross-quantile regressions; economic growth; multilateral currency misalignments; undervaluations.

Current account balances’ divergence in the euro area: an appraisal of the underlying forces

Emmanuelle Faure, Carl Grekou, Valérie Mignon

Abstract

This paper revisits the crucial issue of current account imbalances and focuses on the determinants of their gaps between eurozone Member States. We conduct robust estimations of the current account balances for a panel of ten founding euro area economies and construct a measure that allows us to diagnose why some countries have started to diverge from the eurozone mean in the last two decades. Our findings show evidence of remaining differences in countries’ economic development, meaning that real macroeconomic convergence has failed in the zone. Price and cost competitiveness, as well as fiscal balances, have also participated in this growing macroeconomic divergence. Overall, while the European authorities cannot influence the part of the current account gaps due to demographic factors, the role of fiscal redistribution and investment at the euro area level could help achieve macroeconomic convergence and thus reduce current accounts’ divergence in the zone.

Mot(s) clé(s)

Current account, global imbalances, eurozone

On the desirability of the West African monetary union

Cécile Couharde, Carl Grekou, Valérie Mignon

Abstract

In this paper, we investigate from a policy coordination viewpoint the desirability of the West African monetary union project, ECO. Our approach is built around the inclusion of national objectives in the regional integration perspective. Thanks to cluster analysis, we identify two groups of countries with relatively homogenous sustainable exchange rate paths in West Africa. We also find that no single currency peg nor a freely floating exchange rate regime would be preferable for any of the countries or groups of economies. Overall, our findings argue in favor of two ECOs —at least in a first step, i.e., one for each of the two identified zones. Each ECO would serve as a virtual anchor —with some flexibility— for the considered group, and would be determined by a basket of currencies mainly composed of euro and US dollar.

Mot(s) clé(s)

Monetary integration; West Africa; CFA franc zone; ECOWAS.

The Fata Morgana of Exchange Rate Regimes: Reconciling the LYS and the RR classifications

Cécile Couharde, Carl Grekou

Abstract

This paper provides a comprehensive analysis of the disagreements between the two most popular but also discordant de facto exchange rate regime classifications: the Reinhart and Rogoff and the Levy-Yeyati and Sturzenegger classifications. We estimate probabilities of disagreement between the two classifications for the different exchange rate regime categories, and derive a de facto synthesis classification, using the Receiver Operating Characteristic analysis. We show that more than a third of the observations are not directly comparable, and relatively few disagreements are directly attributable to the classifications’ key variables. Most of the disagreements originate from the different thresholds used by the classifications in the definition of the ERR categories and the interactions between several variables. Given these complexities, the synthesis classification provides a useful framework in terms of greater comparability.

Mot(s) clé(s)

Exchange rate regimes; Probit model; ROC analysis.

Heterogeneity within the euro area: New insights into an old story

Virginie Coudert, Cécile Couharde, Carl Grekou, Valérie Mignon

Abstract

We assess cross-country heterogeneity within the eurozone and its evolution over time by measuring the distances between the equilibrium exchange rates’ paths of member countries. These equilibrium paths are derived from the minimization of currency misalignments, by matching real exchange rates with their economic fundamentals. Using cluster and factor analyses, we identify two distinct groups of countries in the run-up to the European Monetary Union (EMU), Greece being clearly an outlier at that time. Comparing the results with more recent periods, we find evidence of rising dissimilarities between these two sets of countries, as well as within the groups themselves. Overall, our findings illustrate the building-up of macroeconomic imbalances within the eurozone before the 2008 crisis and the fragmentation between its member countries that followed.

Mot(s) clé(s)

Euro area; Equilibrium exchange rates; Cluster analysis; Factor analysis; Macroeconomic imbalances

EQCHANGE: A World Database on Actual and Equilibrium Effective Exchange Rates

Cécile Couharde, Anne-Laure Delatte, Carl Grekou, Valérie Mignon, Florian Morvillier

Abstract

The aim of this paper is to present EQCHANGE, the new database developed by the CEPII on effective exchange rates. EQCHANGE includes two sub-databases containing
data on (i) nominal and real effective exchange rates, and (ii) equilibrium real effective exchange rates and corresponding currency misalignments for advanced, emerging and developing countries. More specifically, the first sub-database delivers effective exchange rates for 187 countries that are computed under three different weighting schemes and two panels of trading partners (186 and top 30) over the 1973-2016 period. The second sub-database provides behavioral equilibrium exchange rate (BEER) estimates and corresponding currency misalignments for 182 economies over the 1973-2016 period. We describe the construction of the two datasets and illustrate some possible uses by presenting results concerning the evolution and main characteristics of currency misalignments in the world from 2015 to 2016. By providing publicly available indicators of equilibrium exchange rates, EQCHANGE aims to contribute to key debates in international macroeconomics.

Mot(s) clé(s)

Exchange rates; Equilibrium exchange rates; Currency misalignments.

Currency Misalignments in emerging and developing countries: reassessing the role of Exchange Rate Regimes

Cécile Couharde, Carl Grekou

Abstract

This paper re-examines empirically the relationship between exchange rate regimes and currency misalignments in emerging and developing countries. Using alternative de facto exchange rate regime classifications over the period 1980-2012, it finds strong evidence that performance of exchange rate regimes is conditional on the de facto classification. In particular, this paper shows that the effect of monetary arrangements on currency misalignments depends critically on the ability of these classification schemes to capture adequately dysfunctional monetary regimes.

Mot(s) clé(s)

Currency misalignments; Exchange rate regimes; Emerging and developing countries.

Does the exchange rate regime shape currency misalignments in emerging and developing countries?

Carl Grekou

Abstract

Relying on a panel of 73 emerging and developing countries and on de facto exchange rate regimes’ classification —over the 1980-2012 period, we re-examine empirically the relationship between exchange rate regimes and currency misalignments. Overall our results suggest that no exchange rate regime performs better than the others as currency misalignments do not substantially and significantly differ across exchange rate regimes. This finding is in contrast to the different arguments (both theoretical and empirical) in favor or against any particular regime and instead supports the exchange regime neutrality view.

Mot(s) clé(s)

Currency misalignments; Exchange rate regimes; Emerging and developing countries.

Currency misalignments and economic growth: the foreign currency-denominated debt channel

Carl Grekou

Abstract

The literature on the growth effects of currency misalignments, although prolific, revolves around two main axes: one the one hand, the export-oriented growth literature which attributes positive effects to undervaluations (competitiveness gains) and, on the other hand, the Washington Consensus view according to which any deviations from equilibrium hamper economic growth. In this paper, we show that there is no "one size fits all" relationship in this regard. Indeed, relying on a panel of 72 developing and emerging countries, we evidence the existence of a foreign currency-denominated debt channel through which misalignments impact growth. Compared to the "traditional" competitiveness channel, this channel works in the opposite direction. The paper therefore reconciles the two strands of the literature: undervaluations may have indeed a positive growth effect, but it is crucial to take into account the possible costs related to this undervaluation to have a clearer picture of the net total effect.

Mot(s) clé(s)

Currency misalignments; Economic growth; Foreign currency-denominated debt.

On the effectiveness of devaluations in emerging and developing countries

Carl Grekou

Abstract

In this paper, we address the issue of devaluations' effectiveness by investigating to what extent a nominal devaluation leads to a real depreciation. Beyond the traditional factors identified by the literature, we pay particular attention to the size of the nominal devaluation and to the initial misalignment of the real exchange rate. Using a sample of 57 devaluation episodes (in 40 developing and emerging countries) and relying on panel data techniques, we evidence that the existence of a sizeable overvaluation of the real exchange rate is a prerequisite to ensure that nominal devaluations will have an expected effect in terms of real depreciations. Furthermore, our results put forward a potential nonlinear relationship between the size of the devaluation and the effectiveness of the nominal adjustment: devaluations operate more efficiently when the magnitude of the nominal adjustment is lower.

Mot(s) clé(s)

Bayesian model averaging; Currency devaluations; Macroeconomic policies; Real exchange rates’ misalignments.

Child Mortality in sub-Saharan Africa: Why Public Health Spending Matters

Carl Grekou, Romain Perez

Abstract

Since 2000, child mortality has dramatically decreased in Africa. Based on an econometrical analysis over 45 sub-Saharan African countries, this paper analyses the determinants of such evolution, and shows that urbanization, sanitation improvement and GDP growth per capita played a critical role in this overall improvement over 2000-2011. The increase in public health expenditures proved to be also decisive, though the elasticity with mortality rate is much weaker. Reaching the Abuja target of 15% of public health expenditure in total public expenditures would have decreased the under-5 child mortality rate by 9% over 2001-2011. It could further reduce this rate by 14% over 2012-2021, and allow Africa to save 19.8 million of children lives. It would also help the region to achieve the Millennium Development Goal on child mortality (reduce by two thirds under-5 child mortality over 1990-2015) by 2022-23, while it would not be reached before 2027 otherwise, according to our estimates.

Mot(s) clé(s)

Millennium Development Goals, MDGs, Under-5 mortality rate, sub-Saharan Africa, Public expenditure on health.

Revisiting the nexus between currency misalignments and growth in the CFA Zone

Carl Grekou

Abstract

In this paper, we revisit the link between currency misalignments and economic growth by taking into account the foreign currency-denominated debt dynamics (except French Franc and euro) for the CFA zone countries over the period 1985-2011. Relying on a BEER approach and using panel cointegration techniques, we first derive currency misalignments. We then estimate a panel smooth transition growth equation that allows us to observe nonlinear impacts of misalignments on both economic growth and foreign currency-denominated debt dynamics. We find that the nonlinear impact of currency misalignments on growth through the competitiveness channel is mitigated by the foreign currency-denominated debt dynamics through a valuation effect.

Mot(s) clé(s)

Currency misalignments, CFA zone, debt, economic growth, panel smooth transition regression