Abstract

This paper analyzes the relationship between currency undervaluation and economic growth in Central and Eastern European (CEE) countries. Rodrik (2008) finds that, in general, developing countries experience higher economic growth when their currency is undervalued. We show that, due to their relatively rapid transition from centrally-planned to market systems, CEE economies are not expected to behave in the same manner as other developing countries. We use Rodrik’s procedure of quantifying the undervaluation of a currency, and a sample of 12 countries with about 20 years of data to run panel data regressions with various control variables. In all instances we find that, for the CEE countries, currency undervaluation is associated with reduced economic growth.

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