The Real Exchange Misalignment and Structural Change: Examining the Development Channel

Abstract

This paper examines the relationship between real exchange rate (RER) misalignment and structural change—the reallocation of labor from low‐ to high‐productivity sectors—recognized as a key mechanism of economic development and growth. Using industry‐level data from multiple sources covering up to 153 countries over 1970–2017, and employing alternative measures of both RER misalignment and structural change, we assess whether RER undervaluation promotes sectoral transformation and long‐run growth. The results indicate that while RER undervaluation is associated with higher aggregate economic growth, especially in developing economies, its effect on structural change is neither robust nor statistically significant across specifications, datasets, misalignment measures, or medium‐ and long‐run. Similarly, persistent undervaluation and overvaluation episodes yield no consistent impact. We confirm these results when we divide the sample into developed and developing country groups. These findings suggest that the growth‐enhancing effects of exchange rate undervaluation may operate through channels other than structural transformation, calling for a reassessment of the mechanisms linking exchange rate policy to long‐run development.