Dollar Study

What does Dollar (1992) investigate?

The effect of real exchange rate distortion and variability on economic growth across 95 developing countries (1976–85).

What is the "distortion index" in Dollar (1992)?

A measure of how far a country’s real exchange rate deviates from its estimated "free-trade" level based on economic fundamentals.

What does a high distortion index indicate?

A highly overvalued or distorted real exchange rate relative to its free-trade level.

Which region had the highest average distortion index according to Dollar (1992)?

Africa (average index ≈ 160).

Which region was moderately overvalued?

Latin America (average index ≈ 114).

Which region was closest to its free-trade real exchange rate?

Asia (average index ≈ 86).

What measure does Dollar use to capture exchange rate variability?

The coefficient of variation of the real exchange rate.

Which region had the most volatile exchange rates?

Latin America (coefficient of variation ≈ 0.22).

How did Africa compare in terms of exchange rate variability?

Relatively stable (≈ 0.15) despite being highly overvalued.

How did Asia compare in terms of exchange rate variability?

Stable and low variability (≈ 0.11).

What does Africa’s combination of high distortion and low variability suggest?

Persistent overvaluation caused by protectionist policies.

What does Latin America’s high variability suggest?

Frequent exchange rate instability and volatility as a key problem.

What is the relationship between exchange rate distortion and GDP per capita growth?

Negative — higher distortion reduces growth.

What is the relationship between exchange rate variability and GDP per capita growth?

Negative — higher volatility reduces growth.

How much extra growth could Latin America have gained with Asian-style exchange rate management?

About +1.5 percentage points.

How much extra growth could Africa have gained with Asian-style exchange rate management?

About +2.1 percentage points.

What were the actual growth rates in Latin America and Africa during 1976–85?

Slightly negative (around -0.3% to -0.4%).

Why are the potential gains from better exchange rate management considered transformative?

They would have shifted both regions from negative to positive growth.

How much growth could be gained by closing the investment rate gap with Asia?

Only about 0.1–0.5 percentage points. Investment rate gap is the difference between Asia and Africa/Latin America’s investment over GDP ratio.

What does this imply about the binding constraint on growth?

Exchange rate policy was more important than investment rates.

What key conclusion does Dollar (1992) draw about outward orientation?

A stable, undistorted real exchange rate is crucial for long-run growth.

What study broadly confirms Dollar’s findings using more recent data?

Habib et al. (2016) ECB study.

What data coverage does Habib et al. (2016) use?

150+ countries from 1970–2010.

What method does Habib et al. (2016) use to address reverse causality?

Instrumental variables.

What does Habib et al. (2016) find about real currency appreciation?

It reduces economic growth.

What does Habib et al. (2016) find about real currency depreciation?

It supports economic growth.

What overarching policy lesson emerges from both studies?

Maintaining a stable and undistorted real exchange rate promotes long-run growth in developing economies.