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Real Exchange Rate Misalignment and Economic Growth: The Case of Trinidad and Tobago

Department of Economics, The University of the West Indies, St. Augustine Campus, St. Augustine, Trinidad and Tobago
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Economies 2018, 6(4), 52; https://doi.org/10.3390/economies6040052
Received: 23 June 2018 / Revised: 17 September 2018 / Accepted: 17 September 2018 / Published: 21 September 2018
(This article belongs to the Special Issue Exchange Rate Dynamics)
Empirical studies outline developing countries’ experience economic growth through an undervalued exchange rate and that exchange rate overvaluations have negative long term effects on economic growth. This paper examined the impact of exchange rate movements as well as exchange rate misalignments on economic growth for the Trinidad and Tobago economy over the period 1960 to 2016. We find statistically significant evidence that both exchange rate appreciation and misalignments impact negatively on economic growth in the T&T economy. Drilling deeper, we find interestingly that there exist no non-linear effects of exchange rate misalignments on growth. Specifically, we find statistically significant evidence that both overvaluations and under valuations hamper economic growth in the Trinidad and Tobago economy. We attribute this to T&T’s small and underdeveloped manufacturing sector that tends to be overlooked on account of its energy resources, in addition to the fact that its manufacturing sector is highly import oriented. A major policy recommendation would be for the critical reassessment of the rules governing the Heritage and Stabilization Fund (HSF), as government expenditure was allowed to follow energy revenues due to its current limitations. View Full-Text
Keywords: exchange rate misalignment; real effective exchange rate; undervaluation; overvaluation; growth; autoregressive distributed lag bounds testing approach; Trinidad and Tobago exchange rate misalignment; real effective exchange rate; undervaluation; overvaluation; growth; autoregressive distributed lag bounds testing approach; Trinidad and Tobago
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Conrad, D.; Jagessar, J. Real Exchange Rate Misalignment and Economic Growth: The Case of Trinidad and Tobago. Economies 2018, 6, 52.

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