Exchange Rate Overvaluation and Trade Protection : Lessons from Experience
Despite a trend toward more flexible rates, more than half the world's countries maintain fixed or managed exchange rates. In the 1980s and 1990s, developing countries as a group progressively liberalized their trade regimes, but some governme...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Online Access: | http://documents.worldbank.org/curated/en/2000/02/438379/exchange-rate-overvaluation-trade-protection-lessons-experience http://hdl.handle.net/10986/22334 |
| id |
okr-10986-22334 |
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| recordtype |
oai_dc |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
AGRICULTURAL GROWTH AGRICULTURE BALANCE OF PAYMENTS BANKING CRISIS BLACK MARKET BLACK MARKET PREMIUM BUDGET DEFICITS CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL OUTFLOWS CENTRAL BANK CLOSED ECONOMIES COMPETITIVE EXCHANGE COMPETITIVE EXCHANGE RATE COMPETITIVE EXCHANGE RATES CURRENCY BOARD CURRENT ACCOUNT CURRENT ACCOUNT DEFICIT DAMAGES DATA AVAILABILITY DEBT DEREGULATION DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT RESEARCH DOMESTIC PRICES DOMESTIC PRODUCTS ECONOMIC ACTIVITY ECONOMIC CONTRACTIONS ECONOMIC DEVELOPMENT ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC POLICIES ECONOMIC POLICY ECONOMIC PROBLEMS ECONOMIC SITUATION ECONOMIC STABILITY ECONOMICS EQUILIBRIUM EXCHANGE RATE EXCHANGE RATE MISALIGNMENT EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATES EXPORT EARNINGS EXPORT GROWTH EXPORTS EXTERNAL FACTORS EXTERNAL SHOCKS EXTERNAL TRADE FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL SECTOR FINANCIAL SYSTEMS FISCAL DEFICIT FISCAL DEFICITS FISCAL POLICIES FIXED EXCHANGE RATE FIXED EXCHANGE RATE REGIMES FLEXIBLE EXCHANGE RATE SYSTEMS FLOATING EXCHANGE RATE FLOATING EXCHANGE RATE REGIME FOREIGN CURRENCY FOREIGN EXCHANGE FOREIGN INFLATION FOREIGN INTEREST RATES FOREIGN INVESTORS GDP GROWTH PROSPECTS GROWTH RATES HIGH INFLATION HIGH RATES IMPORT LIBERALIZATION IMPORT SUBSTITUTION IMPORTS INDEXATION INDUSTRIAL POLICY INDUSTRIALIZATION INTEREST RATES INTERNATIONAL COMPETITIVENESS INTERNATIONAL INVESTORS INTERNATIONAL MARKETS INTERNATIONAL MONETARY FUND INTERNATIONAL TRADE LONG RUN LONG TERM MACROECONOMIC STABILIZATION MARKET PRICES MONETARY EXPANSION MONEY SUPPLY NATIONAL INCOME NATIONAL INCOME ACCOUNTING NOMINAL ANCHOR NOMINAL EXCHANGE RATE OIL OIL PRICES OPEN ECONOMIES OVERVALUATION OVERVALUED EXCHANGE OVERVALUED EXCHANGE RATES POLICY INSTRUMENT POLICY INSTRUMENTS POLICY MAKERS POLICY RESEARCH POLICY TARGETS PRODUCERS PRODUCTIVITY PURCHASING POWER QUOTAS REAL APPRECIATION REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL OUTPUT REAL TERMS REAL WAGES RENT SEEKING RESOURCE ALLOCATION SAVINGS SLOW GROWTH STRUCTURAL ADJUSTMENT SUSTAINED GROWTH TARIFF BARRIERS TAX REFORM TERMS OF TRADE TIGHT MONETARY POLICY TRADABLE GOODS TRADE BALANCE TRADE BARRIERS TRADE DEFICIT TRADE LIBERALIZATION TRADE POLICIES TRADE POLICY TRADE REFORMS TRADE REGIME TRADE REGIMES TRADE SHOCKS TRANSITION COUNTRIES TRANSMISSION MECHANISM TROUGH UNEMPLOYMENT UNEMPLOYMENT RATE WAGE RIGIDITIES WORLD COMMUNITY |
| spellingShingle |
AGRICULTURAL GROWTH AGRICULTURE BALANCE OF PAYMENTS BANKING CRISIS BLACK MARKET BLACK MARKET PREMIUM BUDGET DEFICITS CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL OUTFLOWS CENTRAL BANK CLOSED ECONOMIES COMPETITIVE EXCHANGE COMPETITIVE EXCHANGE RATE COMPETITIVE EXCHANGE RATES CURRENCY BOARD CURRENT ACCOUNT CURRENT ACCOUNT DEFICIT DAMAGES DATA AVAILABILITY DEBT DEREGULATION DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT RESEARCH DOMESTIC PRICES DOMESTIC PRODUCTS ECONOMIC ACTIVITY ECONOMIC CONTRACTIONS ECONOMIC DEVELOPMENT ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC POLICIES ECONOMIC POLICY ECONOMIC PROBLEMS ECONOMIC SITUATION ECONOMIC STABILITY ECONOMICS EQUILIBRIUM EXCHANGE RATE EXCHANGE RATE MISALIGNMENT EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATES EXPORT EARNINGS EXPORT GROWTH EXPORTS EXTERNAL FACTORS EXTERNAL SHOCKS EXTERNAL TRADE FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL SECTOR FINANCIAL SYSTEMS FISCAL DEFICIT FISCAL DEFICITS FISCAL POLICIES FIXED EXCHANGE RATE FIXED EXCHANGE RATE REGIMES FLEXIBLE EXCHANGE RATE SYSTEMS FLOATING EXCHANGE RATE FLOATING EXCHANGE RATE REGIME FOREIGN CURRENCY FOREIGN EXCHANGE FOREIGN INFLATION FOREIGN INTEREST RATES FOREIGN INVESTORS GDP GROWTH PROSPECTS GROWTH RATES HIGH INFLATION HIGH RATES IMPORT LIBERALIZATION IMPORT SUBSTITUTION IMPORTS INDEXATION INDUSTRIAL POLICY INDUSTRIALIZATION INTEREST RATES INTERNATIONAL COMPETITIVENESS INTERNATIONAL INVESTORS INTERNATIONAL MARKETS INTERNATIONAL MONETARY FUND INTERNATIONAL TRADE LONG RUN LONG TERM MACROECONOMIC STABILIZATION MARKET PRICES MONETARY EXPANSION MONEY SUPPLY NATIONAL INCOME NATIONAL INCOME ACCOUNTING NOMINAL ANCHOR NOMINAL EXCHANGE RATE OIL OIL PRICES OPEN ECONOMIES OVERVALUATION OVERVALUED EXCHANGE OVERVALUED EXCHANGE RATES POLICY INSTRUMENT POLICY INSTRUMENTS POLICY MAKERS POLICY RESEARCH POLICY TARGETS PRODUCERS PRODUCTIVITY PURCHASING POWER QUOTAS REAL APPRECIATION REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL OUTPUT REAL TERMS REAL WAGES RENT SEEKING RESOURCE ALLOCATION SAVINGS SLOW GROWTH STRUCTURAL ADJUSTMENT SUSTAINED GROWTH TARIFF BARRIERS TAX REFORM TERMS OF TRADE TIGHT MONETARY POLICY TRADABLE GOODS TRADE BALANCE TRADE BARRIERS TRADE DEFICIT TRADE LIBERALIZATION TRADE POLICIES TRADE POLICY TRADE REFORMS TRADE REGIME TRADE REGIMES TRADE SHOCKS TRANSITION COUNTRIES TRANSMISSION MECHANISM TROUGH UNEMPLOYMENT UNEMPLOYMENT RATE WAGE RIGIDITIES WORLD COMMUNITY Shatz, Howard J. Tarr, David G. Exchange Rate Overvaluation and Trade Protection : Lessons from Experience |
| geographic_facet |
Africa East Asia and Pacific Europe and Central Asia Latin America & Caribbean Sub-Saharan Africa West Africa Argentina Chile Ghana Korea, Republic of Malaysia Turkey Uruguay |
| relation |
Policy Research Working Paper;No. 2289 |
| description |
Despite a trend toward more flexible
rates, more than half the world's countries maintain fixed or
managed exchange rates. In the 1980s and 1990s, developing
countries as a group progressively liberalized their trade
regimes, but some governments defend their exchange rate in
actions that run counter to long-run plans for
liberalization. Without discussing the relative merits of
fixed and flexible exchange rate systems, the authors note
that exchange rate management in many countries has resulted
in overvaluation of the real exchange rate. Roughly twenty
five percent of the countries for which data are available
have overvalued exchange rates, with black market premiums
from 10 percent to more than 100 percent. After surveying
the literature, the authors present lessons from experience
about what has worked (or not) in response to crises
involving external shocks and external trade deficits - and
why. Trying to defend an overvalued exchange rate with
protectionist trade policies is a classic pattern, but
experience shows such protection does significantly retard
the country's growth, and delay its integration into the
world trading community. In fact, and overvalued exchange
rate is often the root cause of protection, preventing the
country from returning to more liberal trade policies that
allow growth and integration into the world community
without exchange rate adjustment. Most developing countries
have downward price and wage rigidities and, with an
external trade deficit, require some form of nominal
exchange rate adjustment to restore external equilibrium.
The authors present cross-country econometric and case study
evidence - citing examples from Argentina, Chile, Ghana, the
Republic of Korea, Malaysia, Turkey, Uruguay, and
Sub-Saharan Africa (including the CFA zone) - that
overvalued exchange rates reduce economic growth. Defending
the exchange rate, they show, has nor no medium-term
benefits, since falling reserves will eventually force
devaluation. Better to have devaluation occur without
further debilitating losses in reserves and lost
productivity because of import controls. After devaluation
the exchange rate will reach a new equilibrium, strongly
influenced by government and central bank policies. |
| format |
Working Paper |
| author |
Shatz, Howard J. Tarr, David G. |
| author_facet |
Shatz, Howard J. Tarr, David G. |
| author_sort |
Shatz, Howard J. |
| title |
Exchange Rate Overvaluation and Trade Protection : Lessons from Experience |
| title_short |
Exchange Rate Overvaluation and Trade Protection : Lessons from Experience |
| title_full |
Exchange Rate Overvaluation and Trade Protection : Lessons from Experience |
| title_fullStr |
Exchange Rate Overvaluation and Trade Protection : Lessons from Experience |
| title_full_unstemmed |
Exchange Rate Overvaluation and Trade Protection : Lessons from Experience |
| title_sort |
exchange rate overvaluation and trade protection : lessons from experience |
| publisher |
World Bank, Washington, DC |
| publishDate |
2015 |
| url |
http://documents.worldbank.org/curated/en/2000/02/438379/exchange-rate-overvaluation-trade-protection-lessons-experience http://hdl.handle.net/10986/22334 |
| _version_ |
1764450620072263680 |
| spelling |
okr-10986-223342021-04-23T14:04:07Z Exchange Rate Overvaluation and Trade Protection : Lessons from Experience Shatz, Howard J. Tarr, David G. AGRICULTURAL GROWTH AGRICULTURE BALANCE OF PAYMENTS BANKING CRISIS BLACK MARKET BLACK MARKET PREMIUM BUDGET DEFICITS CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL OUTFLOWS CENTRAL BANK CLOSED ECONOMIES COMPETITIVE EXCHANGE COMPETITIVE EXCHANGE RATE COMPETITIVE EXCHANGE RATES CURRENCY BOARD CURRENT ACCOUNT CURRENT ACCOUNT DEFICIT DAMAGES DATA AVAILABILITY DEBT DEREGULATION DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT RESEARCH DOMESTIC PRICES DOMESTIC PRODUCTS ECONOMIC ACTIVITY ECONOMIC CONTRACTIONS ECONOMIC DEVELOPMENT ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC POLICIES ECONOMIC POLICY ECONOMIC PROBLEMS ECONOMIC SITUATION ECONOMIC STABILITY ECONOMICS EQUILIBRIUM EXCHANGE RATE EXCHANGE RATE MISALIGNMENT EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATES EXPORT EARNINGS EXPORT GROWTH EXPORTS EXTERNAL FACTORS EXTERNAL SHOCKS EXTERNAL TRADE FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL SECTOR FINANCIAL SYSTEMS FISCAL DEFICIT FISCAL DEFICITS FISCAL POLICIES FIXED EXCHANGE RATE FIXED EXCHANGE RATE REGIMES FLEXIBLE EXCHANGE RATE SYSTEMS FLOATING EXCHANGE RATE FLOATING EXCHANGE RATE REGIME FOREIGN CURRENCY FOREIGN EXCHANGE FOREIGN INFLATION FOREIGN INTEREST RATES FOREIGN INVESTORS GDP GROWTH PROSPECTS GROWTH RATES HIGH INFLATION HIGH RATES IMPORT LIBERALIZATION IMPORT SUBSTITUTION IMPORTS INDEXATION INDUSTRIAL POLICY INDUSTRIALIZATION INTEREST RATES INTERNATIONAL COMPETITIVENESS INTERNATIONAL INVESTORS INTERNATIONAL MARKETS INTERNATIONAL MONETARY FUND INTERNATIONAL TRADE LONG RUN LONG TERM MACROECONOMIC STABILIZATION MARKET PRICES MONETARY EXPANSION MONEY SUPPLY NATIONAL INCOME NATIONAL INCOME ACCOUNTING NOMINAL ANCHOR NOMINAL EXCHANGE RATE OIL OIL PRICES OPEN ECONOMIES OVERVALUATION OVERVALUED EXCHANGE OVERVALUED EXCHANGE RATES POLICY INSTRUMENT POLICY INSTRUMENTS POLICY MAKERS POLICY RESEARCH POLICY TARGETS PRODUCERS PRODUCTIVITY PURCHASING POWER QUOTAS REAL APPRECIATION REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL OUTPUT REAL TERMS REAL WAGES RENT SEEKING RESOURCE ALLOCATION SAVINGS SLOW GROWTH STRUCTURAL ADJUSTMENT SUSTAINED GROWTH TARIFF BARRIERS TAX REFORM TERMS OF TRADE TIGHT MONETARY POLICY TRADABLE GOODS TRADE BALANCE TRADE BARRIERS TRADE DEFICIT TRADE LIBERALIZATION TRADE POLICIES TRADE POLICY TRADE REFORMS TRADE REGIME TRADE REGIMES TRADE SHOCKS TRANSITION COUNTRIES TRANSMISSION MECHANISM TROUGH UNEMPLOYMENT UNEMPLOYMENT RATE WAGE RIGIDITIES WORLD COMMUNITY Despite a trend toward more flexible rates, more than half the world's countries maintain fixed or managed exchange rates. In the 1980s and 1990s, developing countries as a group progressively liberalized their trade regimes, but some governments defend their exchange rate in actions that run counter to long-run plans for liberalization. Without discussing the relative merits of fixed and flexible exchange rate systems, the authors note that exchange rate management in many countries has resulted in overvaluation of the real exchange rate. Roughly twenty five percent of the countries for which data are available have overvalued exchange rates, with black market premiums from 10 percent to more than 100 percent. After surveying the literature, the authors present lessons from experience about what has worked (or not) in response to crises involving external shocks and external trade deficits - and why. Trying to defend an overvalued exchange rate with protectionist trade policies is a classic pattern, but experience shows such protection does significantly retard the country's growth, and delay its integration into the world trading community. In fact, and overvalued exchange rate is often the root cause of protection, preventing the country from returning to more liberal trade policies that allow growth and integration into the world community without exchange rate adjustment. Most developing countries have downward price and wage rigidities and, with an external trade deficit, require some form of nominal exchange rate adjustment to restore external equilibrium. The authors present cross-country econometric and case study evidence - citing examples from Argentina, Chile, Ghana, the Republic of Korea, Malaysia, Turkey, Uruguay, and Sub-Saharan Africa (including the CFA zone) - that overvalued exchange rates reduce economic growth. Defending the exchange rate, they show, has nor no medium-term benefits, since falling reserves will eventually force devaluation. Better to have devaluation occur without further debilitating losses in reserves and lost productivity because of import controls. After devaluation the exchange rate will reach a new equilibrium, strongly influenced by government and central bank policies. 2015-07-29T15:34:56Z 2015-07-29T15:34:56Z 2000-02 Working Paper http://documents.worldbank.org/curated/en/2000/02/438379/exchange-rate-overvaluation-trade-protection-lessons-experience http://hdl.handle.net/10986/22334 English en_US Policy Research Working Paper;No. 2289 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Africa East Asia and Pacific Europe and Central Asia Latin America & Caribbean Sub-Saharan Africa West Africa Argentina Chile Ghana Korea, Republic of Malaysia Turkey Uruguay |