The macroeconomic literature widely supports the existence of a robust association

between economic growth, trade performance and real exchange rate misalignment in terms of

undervaluation, especially for developing economies. Yet, in a world characterized with global

value chains (GVCs), the previous strands of literature become debatable as they assume that

countries export only final goods that do not require any imported intermediate inputs. Thus,

using a cointegration analysis for 143 countries over the period 1995-2018, this paper assesses

the impact of real exchange rate (RER) misalignment on the two main components of GVC

participation: first, the domestic value added of a country which is embodied in the exports of

other countries (Forward GVC Participation); second, the foreign value added embodied in a

country's exports (Backward GVC Participation). Moreover, it investigates how this impact is

contingent to additional factors such as the quality of institutions, the degree of digitalization

and the country's position within the value chain: upstream or downstream country. The main

findings show that RER misalignment exerts a positive impact on both the forward and

backward components of GVC participation. Moreover, misalignment is found to be a counter-

productive policy instrument for promoting GVC participation in countries with good quality

of institutions. However, it proves to be more beneficial for countries with a higher level of

digitalization. Considering the country's position within the value chain, the results show that

downstream countries are better cushioned from exchange rate changes. The robustness of the

results is confirmed after controlling for the endogeneity of RER misalignment using an

instrumental variable approach, investigating whether the impact of RER misalignment is

primarily driven by positive values (undervaluation) or negative values (overvaluation),

running the regressions using Driscoll-Kraay robust standard errors, and utilizing alternative

indicators for the quality of institutions, and for the degree of digitalization.