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Real Exchange Rate Policies for Economic Development

Martin Guzman, Jose Antonio Ocampo and Joseph Stiglitz

No 23868, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D62 F13 F63 L52 O24 P45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
Date: 2017-09
Note: DEV
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Published as Martin Guzman & Jose Antonio Ocampo & Joseph E. Stiglitz, 2018. "Real exchange rate policies for economic development," World Development, vol 110, pages 51-62.

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