The welfare implications of exchange rate choices in developing agricultural economies
Journal of Macroeconomics, 2020, vol. 66, issue C
This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an estimated open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets and imperfect asset markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor re-allocation upon commodity price volatility. When labor and product markets are not well-developed, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a novel rationale as to why exchange rate targeting is implemented in many developing agricultural economies.
Keywords: Open economy macroeconomics; International trade and labor market interactions; Commodity exporters; Incomplete financial markets; Welfare analysis (search for similar items in EconPapers)
JEL-codes: F41 F16 Q17 G1 D60 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:66:y:2020:i:c:s0164070420301592
Access Statistics for this article
Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos
More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().