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Macroeconomic Policy Coordination in a Competitive Real Exchange Rate Strategy for Development

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  • Rapetti Martin

    ()
    (CEDES and University of Buenos Aires, Argentin)

Abstract

Recent research has documented a positive relationship between real exchange rate (RER) levels and economic growth in developing countries. The literature has interpreted this correlation as causality running from RER levels to growth rates; i.e., more competitive RER levels tend to favor growth. Little effort has been made, however, on the analysis of the policy instruments required to implement a successful competitive RER strategy. An exchange rate policy targeting a permanent change in the RER may run into difficulties: it is well documented that nominal and real exchange rate movements are correlated almost one for one in the short run but such co-movement vanishes in the long run. Targeting instead a transitory RER undervaluation can have long-lasting effects on economic performance if RER competitiveness is stable and durable enough to provide incentives for modern tradable activities to expand. The ability to provide such an environment may be beyond the scope of exchange rate policy. This paper aims to shed light on the complementary policies that facilitate the success of an exchange rate policy that temporarily increases competitiveness. A formal model is developed to analyze these issues. The main conclusion is that a currency depreciation is more likely to accelerate growth if it is simultaneously implemented with domestic demand management policies that prevent non-tradable price inflation and wage management policies that coordinate wage increases with tradable productivity growth.

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Bibliographic Info

Article provided by De Gruyter in its journal Journal of Globalization and Development.

Volume (Year): 3 (2013)
Issue (Month): 2 (March)
Pages: 1-31

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Handle: RePEc:bpj:globdv:v:3:y:2013:i:2:p:1-31:n:2

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  1. Martín Rapetti & Peter Skott & Arslan Razmi, 2012. "The real exchange rate and economic growth: are developing countries different?," International Review of Applied Economics, Taylor & Francis Journals, vol. 26(6), pages 735-753, April.
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  3. Roberto Frankel & Martín Rapetti, 2010. "A Concise History of Exchange Rate Regimes in Latin America," CEPR Reports and Issue Briefs 2010-11, Center for Economic and Policy Research (CEPR).
  4. Frankel, Jeffrey, 2005. "Contractionary Currency Crashes In Developing Countries," Working Paper Series rwp05-017, Harvard University, John F. Kennedy School of Government.
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  8. Gabriel Porcile & Gilberto Tadeu Lima, 2010. "Real exchange rate and elasticity of labour supply in a balance-of-payments-constrained macrodynamics," Cambridge Journal of Economics, Oxford University Press, vol. 34(6), pages 1019-1039.
  9. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
  10. Razmi, Arslan & Rapetti, Martin & Skott, Peter, 2012. "The real exchange rate and economic development," Structural Change and Economic Dynamics, Elsevier, vol. 23(2), pages 151-169.
  11. Alvaro Aguirre & César Calderón, 2005. "Real Exchange Rate Misalignments and Economic Performance," Working Papers Central Bank of Chile 316, Central Bank of Chile.
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Cited by:
  1. Martín Rapetti, 2013. "The Real Exchange Rate and Economic Growth: Some Observations on the Possible Channels," UMASS Amherst Economics Working Papers 2013-11, University of Massachusetts Amherst, Department of Economics.
  2. Frenkel, Roberto & Rapetti, Martín, 2012. "Exchange rate regimes in the major Latin American countries since the 1950s: lessons from history," Revista de Historia Económica, Cambridge University Press, vol. 30(01), pages 157-188, March.
  3. Allegret, Jean-Pierre & Sallenave, Audrey, 2014. "The impact of real exchange rates adjustments on global imbalances: A multilateral approach," Economic Modelling, Elsevier, vol. 37(C), pages 149-163.
  4. Damill, Mario & Frenkel, Roberto, 2012. "Macroeconomic Policies, Growth, Employment, and Inequality in Latin America," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. Roberto Frenkel & Martin Rapetti, 2012. "External Fragility or Deindustrialization: What is the Main Threat to Latin American Countries in the 2010s?," World Economic Review, World Economics Association, vol. 2012(1), pages 3, September.
  6. Peter Skott & Martin Rapetti & Arslan Razmi, 2012. "Real exchange rates and the long-run effects of aggregate demand in economies with underemployment," UMASS Amherst Economics Working Papers 2012-06, University of Massachusetts Amherst, Department of Economics.

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