The Real Exchange Rate and Growth Link: It is Mainly About Saving

Transcription

1 The Real Exchange Rate and Growth Link: It is Mainly About Saving Augusto de la Torre XXVI Ciclo de Jornadas Económicas Banco Central de Guatemala Junio 2017

2 Structure of presentation From the real exchange rate to growth: what do we know? The missing link: saving Conclusions 2

3 From the real exchange rate to growth 3

4 What do we know? A competitive RER favors the tradable sector; does that lift growth? Empirics Rodrik (2008): countries with more depreciated real exchange rates have larger tradable sectors and growth faster a causal relation Levy Yeyatti et al. (2013): countries that pursue FX intervention to maintain external competitiveness invest more and, hence, grow faster Hausmann et al. (2005): growth accelerations are more likely to occur in countries with more competitive real exchange rates Theory Tradables generate more positive learning externalities (Rodrik, 2008), especially since they are more capital intensive (Korinek & Servén, 2010) The role of externalities in growth remains empirically elusive to date (Giles and Williams, 2000; and Harrison and Rodriguez-Clare, 2009). 4

5 But what determines the real exchange rate and makes it more competitive? The mainstream view The (steady state) equilibrium RER reflects the relative productivity of the tradable to the non-tradable sector As countries develop, the productivity of tradables rises relative to that of nontradables and the RER appreciates (the Balassa-Samuelson effect) Productivity is driven by supply-side factors Demand factors and monetary policy have no durable impact on RER Investment (a demand-side factor) follows expected productivity, which in turn determines the RER; it is immaterial how investment is financed Monetary policy, via volatility-focused FX intervention, can mitigate excessive deviations of the RER from its equilibrium level An over-valued RER boosts consumption (lowers saving) And may hinder growth (Rodrik) Policy should focus on productivity instead of tinkering with the RER 5

6 There is a missing link in the mainstream view Growth? Real Exchange Rate? Saving (Domestic Demand) 6

7 Is the equilibrium RER independent of demand factors? Theoretical hints Domestic demand affects the equilibrium RER if saving is suboptimal Foreign saving is unavailable (Korinek & Servén, 2010) or constrained by agency (e.g., collateral) frictions (Itskhoki and Moll, 2014) Private savers do not internalize the positive learning externalities of the capital intensive tradable sector As a result, suboptimal saving leads to lower investment and to an appreciated RER, resulting in a smaller tradable sector and lower growth or if factor re-allocation across firms, sectors and borders is sluggish and affected by recurrent, stochastic shocks Empirical hints Bergstrand (1991) and De Gregorio et al (1993) document the importance of domestic demand factors as determinants of RERs Hsieh & Klenow (2009) find a wide dispersion of productivities/returns across firms/sectors in developing countries (sluggish re-allocation) 7

8 The saving-rer-growth links are explored systematically in recent papers Structural (medium-term) relations De la Torre and Ize (2015): Should Latin America Save More to Grow Faster? Cyclical (shorter-term) relations De la Torre, Ize and Filippini (2016): The Commodity Cycle in Latin America: Mirages and Dilemmas Here, we focus on structural patters 8

9 From saving (domestic demand) to growth Via the real exchange rate (the ER channel) Low saving => demand pressures on market for non-tradables and current account deficits => appreciated RER => lower growth Driven by un-internalized learning externalities (tradable and non-tradable sectors not perfect substitutes as far as growth is concerned) and given sluggish factor re-allocation cum hysteresis Low saving can lead to low growth via an uncompetitive RER as long as BOP remains viable (low/stable sovereign risk premium) Via the real interest rate (the IR channel) Low saving => CA deficits => vulnerable BOP => low growth Driven by un-internalized crisis externalities (foreign and domestic saving are not perfect substitutes as far as growth is concerned) Low saving can lead to low growth via a high sovereign risk premium despite a depreciated RER! 9

10 Structural patterns in the data: the world and LAC 10

11 Relative to benchmark, over-valued (less competitive) RERs are associated with lower growth but not clearly the case of LAC Domestic Real Exchange Rate and Growth Gaps ( ) 11

12 Relative to benchmark, under-saving is associated with over-valued (more competitive) RERs but not clearly the case of LAC Domestic Saving and Real Exchange Rate Gaps ( ) 12

13 Relative to benchmark, under-saving is associated with underratings (high sovereign risk premium) LAC under-rated/under-saver Domestic Saving and Sovereign Rating Gaps ( ) 13

14 Putting it all together: the ER channel dominates global sample under-savers have over-valued RERs and invest and grow less Average Gaps by Q uadrant in the Saving-Real Exchange Rate Space, Over-saving National Saving Gap -1.1 Undervalued Under-saving Overvalued Real Exchange Rate Gap Country Rating Growth Investment Notes: Bars show the average gaps for the quadrants determined by the national saving and real exchange rate gaps for the period for the whole world sample. Sources: De la Torre and Ize (2015). 14

15 but the IR channel is also discernible: under-savers that are underrated invest less despite their under-valued RERs Average Gaps by Q uadrant in the Saving-Real Exchange Rate Space, Over-saving National Saving Gap -1.1 Undervalued Under-saving Overvalued Real Exchange Rate Gap Country Rating Growth Investment Notes: Bars show the average gaps for the quadrants determined by the national saving and real exchange rate gaps for the period for the whole world sample. Sources: De la Torre and Ize (2015). 15

16 Outward-orientation is associated with higher saving rates and more competitive RERs Middle Income Countries: Relative Importance of External Demand and Saving Rates Averages Real Exchange Rate Gap and Relative Importance of External Demand

17 LAC s larger economies have alternated between IR and ER phases Correlation Coefficient for Saving and Real Exchange Rate Gaps for LAC s Larger Countries (Except Argentina and Venezuela) Under-saving and undervalued RERs Under-saving and overvalued RERs Notes: The sample includes Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Panama, Peru, and Uruguay. Sources: De la Torre and Ize (2015). 17

18 Some conclusions 18

19 External competitiveness matters for growth and saving matters for external competitiveness A more competitive RER promotes tradable sector expansion which lifts overall growth Arguably due to greater learning externalities Higher saving sustains a more competitive RER (ER channel) Especially where factor re-allocation is sluggish and prevents vulnerable BOP and macro trajectories (IR channel) Hence, saving matters for growth Monetary policy does not affect the RER durably but it can prevent excessive deviations of the RER from its equilibrium Transitory but excessive RER appreciations can have permanent adverse effects on growth Policies to strengthen saving are key component of a growth oriented reform strategy 19

20 Thank you! 20