Real Exchange Rates, Trade, and Growth: Italy 1861-2011

69 Pages Posted: 22 Mar 2013

See all articles by Virginia Di Nino

Virginia Di Nino

Bank of Italy

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Massimo Sbracia

Bank of Italy

Date Written: October 25, 2011

Abstract

What is the relationship between real exchange rate misalignments and economic growth? And what effect, if any, did undervaluations or overvaluations of the lira/euro have on Italy's growth? We address these questions by presenting, first, three main facts: (i) there is a positive relationship between undervaluation and growth; (ii) this relationship is strong for developing countries and weak for advanced countries; (iii) these results tend to hold for both the pre- and the post-World War II period. Building a simple analytical model, we explore channels through which undervaluation may exert a positive effect on real GDP. We assume that productivity is higher in the tradeable-goods than in the non-tradeable-goods sector, and examine the roles of market structure, scale economies and wage flexibility in channelling resources from the latter to the former sector, increasing exports and real GDP. We then turn to Italy and verify empirically that, as the theory suggests, undervaluation has positively affected its exports. Undervaluation has been helpful, in particular, to increase the exports of high-productivity sectors, such as most manufacturing industries. Finally, we describe the misalignments of the lira/euro since 1861, analyze their determinants and draw the implications for Italy's economic growth.

Keywords: currency misalignments, competitiveness, Italy, export, growth

JEL Classification: F30, F10, O10, N00

Suggested Citation

Di Nino, Virginia and Eichengreen, Barry and Sbracia, Massimo, Real Exchange Rates, Trade, and Growth: Italy 1861-2011 (October 25, 2011). Bank of Italy Economic History Working Paper No. 10, Available at SSRN: https://ssrn.com/abstract=2236718 or http://dx.doi.org/10.2139/ssrn.2236718

Virginia Di Nino

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Barry Eichengreen

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Massimo Sbracia (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 3860 (Phone)
+39 06 4792 4118 (Fax)

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