Working Paper: NBER ID: w2179
Authors: Sebastian Edwards
Abstract: This paper deals with the relation between commercial policy and "the" equilibrium real exchange rate. The paper clarifies the meaning of real exchange rate by comparing five different definitions that are currently found in the literature, The analysis focuses on the effects of an economic liberalization program that reduces import tariffs on the equilibrium real exchange rate under a number of alternative assumptions regarding capital mobility. From a policy perspective this is an important issue, since countries that embark on liberalization are usually concerned with avoiding real exchange rate misalignment and overvaluation. The effects of terms of trade shocks on the equilibrium real exchange rate are also investigated.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in tariffs (F13) | Equilibrium real depreciation (F31) |
| Reduction in tariffs (F13) | Equilibrium real appreciation (F31) |
| Reduction in tariffs (F13) | Demand for imports increases (F10) |
| Demand for imports increases (F10) | Equilibrium real depreciation (F31) |
| Initial tariff level and elasticity of demand for nontradables (F16) | New equilibrium real exchange rate (F31) |