Short-term and long-term growth effects of exchange rate adjustment

During the European sovereign debt crisis the discussion concerning the pros and cons of exchange rate adjustment in the face of asymmetric shocks has been revived. Whereas one side has recommended (in the spirit of Keynes) the exit from the euro area to regain rapidly international competitiveness, exchange rate stability cum structural reforms have been argued (in the spirit of Schumpeter) to be a beneficial long-term strategy towards the reanimation of a robust growth performance. Previous literature has estimated the average growth performance of countries with different degrees of exchange rate volatility. We augment this literature by econometrically separating between the short-term and long-term growth effects of exchange rate volatility based on a panel-cointegration framework for a sample of 60 countries clustered in five country groups. The estimations show that countries with a low degree of exchange rate volatility exhibit a higher long-term growth performance, whereas over the short-run exchange rate flexibility provides some benefits.