QUALITY OF INSTITUTIONS AND DEVIATION OF THE EXCHANGE RATES FROM THE PURCHASING POWER PARITY: IMPACT ON ECONOMIC GROWTH

Victor Koziuk

Authors

Victor Koziuk TNEU

Keywords:

Quality of institutions, purchasing power parity, exchange rate, global competitiveness, real convergence, global monetary relations.

Abstract

It is stressed, that the global monetary relations are distorting the global
competitiveness. Economic growth maintaining under the middle and low income
countries competitive pressure is possible with the deviating down of the nominal
exchange rate from PPP or with high graded institutions developing that can encourage innovations, business opportunities, and capital inflows. Basing on the
data of 82 countries it is empirically confirmed direct and statistically meaningful
relations between quality of institutions and exchange rate deviations from PPP.
It is found that five clusters of the countries joined by the principle of quality of institutions and exchange rate deviations from PPP. The highest economic growth
is observed in the countries with strong institutions and little undervalued exchange rates. The countries with low graded institutions may maintain economic
growth only under the strong undervaluation of currency. Developed countries
may deal with the competitive pressure due to the institutions of high quality.
Quality of institutions and institutional competition are expected to be the most
important forms of the global economy fragmentation.

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