Publication detail

Exchange Rates and the Speed of Economic Recovery: The Role of Financial Development

Author(s): Ing. Boris Fišera PhD.,
Type: IES Working Papers
Year: 2022
Number: 18
ISSN / ISBN:
Published in: IES Working Papers 18/2022
Publishing place: Prague
Keywords: Economic recovery, exchange rate, currency depreciation, real undervaluation, financial development, interacted panel VAR (IPVAR)
JEL codes: F10, F30, F31, F43
Suggested Citation: Fisera B. (2022): "Exchange Rates and the Speed of Economic Recovery: The Role of Financial Development" IES Working Papers 18/2022. IES FSV. Charles University.
Abstract: We study the influence of the exchange rate on the speed of economic recovery in a sample of 67 developed and developing economies over the years 1989-2019. First, using a cross-sectional sample of 341 economic recoveries, we study the effect of nominal depreciation and real undervaluation on the length of economic recovery. Our findings indicate that both nominal depreciation and real undervaluation increase the speed of economic recovery. However, this finding only holds for smaller depreciations/ undervaluations. Second, we use an interacted panel VAR (IPVAR) model to investigate the effect of real undervaluation on the speed of economic recovery after external shock. While we once again find evidence that undervalued domestic currency increases the speed of economic recovery, its positive effect seems limited in size. Furthermore, we also explore the role of financial development in influencing the effectiveness of undervalued domestic currency in stimulating the economic recovery. We find that the higher level of financial development seems to limit the negative effect of an overvalued currency on the speed of economic recovery, but not to influence the effect of an undervalued currency on economic recovery.
Downloadable: wp_2022_18_fisera

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