The Exchange Rate as an Industrial Policy

Pablo Ottonello, Diego J. Perez and William Witheridge

No 32522, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the role of exchange rates in industrial policy. We construct an open-economy macroeconomic framework with production externalities and show that the desirability of these policies critically depends on the dynamic patterns of externalities. When they are stronger in earlier stages of development, economies that are converging to the technological frontier can improve welfare by intervening in foreign exchange markets, keeping the exchange rate undervalued, and speeding the transition; economies that are not converging to the technological frontier are better off not using the exchange rate as an industrial policy tool. Capital-flow mobility and labor market dynamism play a central role in the effectiveness of these policies. We also discuss the role of capital controls as an industrial policy tool and use our framework to interpret historical experiences.

JEL-codes: F0 F3 F4 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-his, nep-ifn, nep-mon and nep-opm
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