Manufacturing and the real exchange rate: natural resource rents matter when measuring misalignments

We analyse the relationship between the share of manufacturing in GDP and real exchange rate misalignments based on the purchasing power parity criterion (PPP) and a sample of 102 developing and transition economies (2003–2019). In a departure from usual practice, we subtract natural resource rents from GDP in order to correct misalignments for the productivity bias. A dynamic threshold panel model is used and we separate out the impact of undervaluation and overvaluation components in the same regression. Overvaluation has a negative linear effect, while undervaluation stimulates the manufacturing sector in a non-linear way. Above an 18% threshold, the marginal effect of undervaluation diminishes.