The Impact of Real Exchange Rate Undervalaution on the Export Performance of Upper Middle Income Countries between 1992 and 2007

Abstract

ABSTRACT

The purpose of this thesis is to analyze the impact of real exchange rate undervaluation on export performance within the context of upper-middle-income countries. Specifically, this study uses fixed effects and random effects models to examine this relationship in 39 such countries using panel data for the years 1992 to 2007 drawn from the World Development Indicators and other relevant economic databases. In order to isolate the effect of real exchange rate undervaluation, I control for factors such as trade openness and financial development. In contrast to similar analyses existing in the academic literature, this study will be conducted both at the aggregate and sectoral levels including the high-tech, service and merchandise export sectors. Contrary to conventional wisdom, my findings suggest that the high-tech export industry is the most responsive to real exchange rate undervaluation while merchandise exports are the least responsive. These results indicate undervaluation strategies are generally associated with improved export performance, particularly in the high-tech export sector.

Key words: Real Exchange Rate Undervaluation, Export, Upper-Middle-Income Countries