Real Exchange Rate Policies for Economic Development
This paper analyzes the role of real exchange rate (RER) policies in promoting economic development. Markets provide a suboptimal amount of investment in sectors characterized by learning spillovers. We show that a stable and competitive RER policy may correct for this externality and other related market failures. The resulting development of these sectors leads to overall faster economic growth. A system of effectively multiple exchange rates is required when spillovers across different tradable sectors differ. The impact of RER policies is increased when they are complemented by traditional industrial policies that increase the elasticity of the aggregate supply to the RER. Among the instruments required to implement a stable and competitive RER are interventions in the foreign exchange market and regulation of capital flows. We also discuss the trade-offs associated with alternative stable and competitive RER policies.
We are thankful to Rob Davies, Daniel Heymann, Juan Montecino, Ebrahim Patel, Martin Rapetti, Germán Reyes, Laurence Wilse-Samson, participants of a Seminar at The Department of Trade and Industry of South Africa, the Economics seminar at the University of Buenos Aires, Columbia IPD Conference “Exploring New Paths for Development: Experiences for Latin America and China” (held in Beijing, August 2015), and the Eastern Economic Association for useful comments and suggestions, two anonymous referees, and Debarati Ghosh, Zaakir Tameez, and Leo Wang for editorial and research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Martin Guzman & Jose Antonio Ocampo & Joseph E. Stiglitz, 2018. "Real exchange rate policies for economic development," World Development, vol 110, pages 51-62. citation courtesy of