The Real Exchange Rate and Development. Theory, Evidence, Issues, and Challenges

Authors

Firat Demir, University of OklahomaFollow
Arslan Razmi, University of Massachusetts - AmherstFollow

Working Paper Number

2020-06

Publication Date

2020

Abstract

This paper surveys the theoretical and empirical literature on the effects of the real exchange rate (RER) on international trade, economic development and growth. We summarize the main conceptual issues, discuss the relevance of the RER as an instrument of development policy, provide an overview of the macroeconomic and microeconomic mechanisms that link the RER to trade and long run growth and development, analyze the challenges – especially the disconnect between theory and data -- that often arise in empirical applications, and present new avenues for future research. In the process, we present some updated estimates and illustrative figures. The mechanisms through which the RER influences long-run growth and structural change outcomes remains a promising area of research and the relevance of individual channels in different contexts deserves much more careful investigation. Greater data availability should help fill some of these gaps in our understanding.

DOI

https://doi.org/10.7275/18586883

License

UMass Amherst Open Access Policy

Recommended Citation

Demir, Firat and Razmi, Arslan, "The Real Exchange Rate and Development. Theory, Evidence, Issues, and Challenges" (2020). UMass Amherst Economics Working Papers. 289.
https://doi.org/10.7275/18586883