Misaligned currencies and economic growth: The role of global value chains

We investigate the impact of global value chain (GVC) participation on the relationship between real exchange rate misalignment and economic growth. Employing a panel framework encompassing 183 countries from 1990 to 2019, we find that an undervalued real exchange rate is associated with higher economic growth. However, our analysis also reveals that increased GVC participation diminishes the positive effect of undervaluation on economic growth with moderate statistical significance. Consequently, the potential competitiveness gains from an undervalued currency might be offset by deeper integration into global production networks. It is worth noting that the empirical findings are most prominent for advanced economies.