The impact of real exchange rates adjustments on global imbalances: A multilateral approach

An extensive literature stresses that currency misalignments are costly in terms of growth performance. However, these studies do not consider the direct and indirect effects of currency misalignments on other countries. In this paper, we analyze how misalignments of the dollar, the euro, and the renminbi affect their respective economies and those of their trading partners using a multi-country dataset GVAR model. Our model includes 15 advanced and emerging countries and uses quarterly data spanning the period 1980–2010. We find that misalignments significantly influence the world economy. We show that overvaluation and undervaluation shocks do not produce the same effects. •We find that misalignments significantly influence the world economy. exchange rate adjustment matter to reduce global imbalances, our findings suggest that we must not wait too much about the magnitude of this influence.•We show that overvaluation and undervaluation shocks do not produce the same effects. One of our striking results is the fact that the renminbi undervaluation (overvaluation) exerts a contractionary (expansionary) impact on world growth.