Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations

Felipe Meza and Carlos Urrutia ()

No 2010/063, IMF Working Papers from International Monetary Fund

Abstract: We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across sectors and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account for 60 percent of the decline in the relative price of tradable goods and explain a large fraction of the reallocation of labor across sectors. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, terms of trade, or import tariffs.

Keywords: WP; interest rate (search for similar items in EconPapers)
Pages: 40
Date: 2010-03-01
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Journal Article: Financial liberalization, structural change, and real exchange rate appreciations (2011)
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