The Real Exchange Rate and Development - Theory, Evidence, Issues, and Challenges

Raphael Gouvea (raphael.gouvea@ipea.gov.br)
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Raphael Gouvea: Institute for Applied Economic Research (IPEA); Department of Economics, University of Massachusetts Amherst

UMASS Amherst Economics Working Papers from University of Massachusetts Amherst, Department of Economics

Abstract: This paper surveys the theoretical and empirical literature on the effects of the real exchange rate (RER) on international trade, economic development and growth. We summarize the main conceptual issues, discuss the relevance of the RER as an instrument of development policy, provide an overview of the macroeconomic and microeconomic mechanisms that link the RER to trade and long run growth and development, analyze the challenges – especially the disconnect between theory and data -- that often arise in empirical applications, and present new avenues for future research. In the process, we present some updated estimates and illustrative figures. The mechanisms through which the RER influences long-run growth and structural change outcomes remains a promising area of research and the relevance of individual channels in different contexts deserves much more careful investigation. Greater data availability should help fill some of these gaps in our understanding.

Keywords: Real exchange rate; Economic development; Structural change; Economic growth; International trade (search for similar items in EconPapers)
JEL-codes: E2 F31 F43 O11 O24 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-fdg and nep-opm
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