Exchange Rate Misalignment and Economic Growth: A Thematic Review of Theory and Empirics

Abstract

The relationship between exchange rate and economic activities has remained the most questioned matter in international economics. Although typical economic philosophy advocates that exchange rate arrangements and misalignment should exercise momentous effects on trade, foreign investment, and economic expansion, but data driven evidence has repeatedly produced diverse and, every so often, inconsistent outcomes, thus intensifying the famous exchange rate disconnect puzzle. This review paper offers a wide-ranging thematic blend of the theoretical and empirical literature on determination of real exchange rate, estimation of equilibrium real exchange rate, exchange rate misalignment, and its growth effects on economic activities. The review builds on influential theoretic work from 1960s and empirical research studies available up to 2025, with more stress on post-1990 panel data evidence. The review shows that empirical evidence on exchange rate misalignment and its growth effects remains inconclusive, indicating considerable heterogeneity over different countries, timespans, and methodological methods. However numerous studies classify clear transmission mechanism like terms of trade, export competitiveness, investment choices, and production aspects but some highlight weak relationship. The literature review finds gaps linked to measurement selections, endogeneity apprehensions, and restricted regional exposure. The paper concludes by offering policy-oriented understanding for exchange rate management targeted at reducing misalignment and supporting long run economic growth.