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The real exchange rate and economic development

Martin Rapetti, University of Massachusetts Amherst

Abstract

This dissertation studies the influence of the level of the real exchange rate on economic development. It first provides an econometric evaluation of this relationship. The main finding is that competitive real exchange rates tend to be associated with higher economic growth. The association is especially strong and statistically significant for developing countries. It then develops a historical narrative and episode analyses of several Latin American countries since the post-Second World War, in which the relationship is further investigated. There are three main findings. First, Latin American countries have experienced external and financial crises with immediate and/or long-lasting negative effects on growth that resulted from persistent real exchange rate overvaluation. Second, the most successful episodes of growth acceleration in the region have occurred in periods during which the governments aimed at maintaining stable and competitive real exchange rates. Finally, the analysis shows that currency over and undervaluation emerged as a result of explicit economic policies. This finding suggests that governments can use economic policy to manage the level and volatility of the real exchange rate to promote economic development. How macroeconomic policy needs to be managed to that end is evaluated with a formal model. The model shows that exchange rate policy targeting a competitive currency would more likely accelerate growth if it is implemented in coordination with domestic demand management policies that prevent non-tradable price inflation and wage management policies that coordinate the pace of wage increases with tradable productivity growth. An empirical illustration of these results is carried out through a comparative study of Argentina during the 2000s and Chile between the mid 1980s and the mid 1990s.^

Subject Area

Economic history|Economic theory

Recommended Citation

Rapetti, Martin, "The real exchange rate and economic development" (2011). Doctoral Dissertations Available from Proquest. AAI3482722.
http://scholarworks.umass.edu/dissertations/AAI3482722

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