Working Paper: NBER ID: w23868
Authors: Martin Guzman; Jos Antonio Ocampo; Joseph E. Stiglitz
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.
Keywords: real exchange rate; economic development; industrial policies; capital account regulations
JEL Codes: D62; F13; F63; L52; O24; P45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RER policies (R50) | economic growth (O49) |
| RER policies (R50) | investment externalities (D62) |
| RER policies (R50) | market failures (D52) |
| RER policies (R50) | sectoral diversification (L52) |
| competitive RER (R32) | profitability of tradable sectors (F14) |
| competitive RER (R32) | real wages in the future (J39) |
| RER policies (R50) | elasticity of aggregate supply (E23) |
| coordination among macroeconomic policies (E61) | effectiveness of RER policies (F68) |