Economic Liberalization and the Equilibrium Real Exchange rate in Developing Countries

Sebastian Edwards

NBER Working Paper No. 2179 (Also Reprint No. r1557)
Issued in April 1991
NBER Program(s):   ITI   IFM

This paper deals with the relation between commercial policy and "the" equilibrium real exchange rate. The paper clarifies the meaning of real exchange rate by comparing five different definitions that are currently found in the literature, The analysis focuses on the effects of an economic liberalization program that reduces import tariffs on the equilibrium real exchange rate under a number of alternative assumptions regarding capital mobility. From a policy perspective this is an important issue, since countries that embark on liberalization are usually concerned with avoiding real exchange rate misalignment and overvaluation. The effects of terms of trade shocks on the equilibrium real exchange rate are also investigated.

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Published: Debt, Stabilization & Development, edited by Guillermo Calvo et al, pp. 163-184. Oxford: Basil Blackwell Ltd., 1989.

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