Quality of Institutions and Deviation of the Exchange Rates from the Purchasing Power Parity: Impact on Economic Growth

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.