Real exchange rate policies for economic development
Jose Antonio Ocampo and
World Development, 2018, vol. 110, issue C, 51-62
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 and the relationship between the use of exchange rate policies for macro-stability and for development.
Keywords: Real exchange rate; Learning spillovers; Dynamic comparative advantage; Industrial policies; Capital account policies (search for similar items in EconPapers)
JEL-codes: D62 F13 F63 L52 O24 P45 (search for similar items in EconPapers)
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Working Paper: Real Exchange Rate Policies for Economic Development (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:110:y:2018:i:c:p:51-62
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