Advanced Search
MyIDEAS: Login

The real exchange rate and economic development

Contents:

Author Info

  • Razmi, Arslan
  • Rapetti, Martin
  • Skott, Peter

Abstract

Recent empirical studies have found a robust correlation between competitive exchange rates and economic growth in developing economies. This paper presents (i) a formal model to help explain these findings and (ii) econometric evidence on the relation between investment and the real exchange rate. The model emphasizes the existence of (hidden) unemployment as a source of endogenous growth, even under constant returns to scale. Growth promoting policies, however, affect the external balance, and two instruments are needed in order to achieve targets for both the growth rate and the trade balance. The real exchange rate can serve as one of those instruments. The implications of the model for the relation between real exchange rates and the rate of capital accumulation find support in our econometric analysis.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0954349X12000033
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Structural Change and Economic Dynamics.

Volume (Year): 23 (2012)
Issue (Month): 2 ()
Pages: 151-169

as in new window
Handle: RePEc:eee:streco:v:23:y:2012:i:2:p:151-169

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/525148

Related research

Keywords: Real exchange rates; Underemployment; Capital accumulation; Investment; Growth;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," NBER Working Papers 13619, National Bureau of Economic Research, Inc.
  2. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2007. "Fear of Appreciation," Working Paper Series rwp07-047, Harvard University, John F. Kennedy School of Government.
  3. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment Updates and Implications," NBER Working Papers 7911, National Bureau of Economic Research, Inc.
  4. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2007. "Governance Matters VI: Aggregate and Individual Governance Indicators, 1996-2006," Policy Research Working Paper Series 4280, The World Bank.
  5. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  6. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  7. Peter Skott & Peter Flaschel, 2004. "Steindlian Models of Growth and Stagnation," UMASS Amherst Economics Working Papers 2004-11, University of Massachusetts Amherst, Department of Economics.
  8. Hausmann, Ricardo & Rodrik, Dani, 2003. "Economic development as self-discovery," Journal of Development Economics, Elsevier, vol. 72(2), pages 603-633, December.
  9. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
  10. 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.
  11. Kuijs, Louis, 2006. "How will China's saving-investment balance evolve ?," Policy Research Working Paper Series 3958, The World Bank.
  12. Campa, Jose Manuel & Goldberg, Linda S, 1999. "Investment, Pass-Through, and Exchange Rates: A Cross-Country Comparison," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 287-314, May.
  13. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2009. "Governance matters VIII : aggregate and individual governance indicators 1996-2008," Policy Research Working Paper Series 4978, The World Bank.
  14. Jonathan David Ostry & Andrew Berg & Jeromin Zettelmeyer, 2008. "What Makes Growth Sustained?," IMF Working Papers 08/59, International Monetary Fund.
  15. Wang, Lili & Szirmai, Adam, 2008. "Regional Capital Inputs in Chinese Industry and Manufacturing, 1978-2003," GGDC Research Memorandum GD-99, Groningen Growth and Development Centre, University of Groningen.
  16. Bahmani-Oskooee, Mohsen & Niroomand, Farhang, 1998. "Long-run price elasticities and the Marshall-Lerner condition revisited," Economics Letters, Elsevier, vol. 61(1), pages 101-109, October.
  17. Paulo Gala, 2008. "Real exchange rate levels and economic development: theoretical analysis and econometric evidence," Cambridge Journal of Economics, Oxford University Press, vol. 32(2), pages 273-288, March.
  18. Chinn, Menzie David & Wei, Shang-Jin, 2008. "A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?," CEPR Discussion Papers 7076, C.E.P.R. Discussion Papers.
  19. Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
  20. Rodrik, Dani, 2009. "Growth After the Crisis," CEPR Discussion Papers 7480, C.E.P.R. Discussion Papers.
  21. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," NBER Working Papers 6174, National Bureau of Economic Research, Inc.
  22. Mohsen Bahmani-Oskooee & Massomeh Hajilee, 2010. "On the relation between currency depreciation and domestic investment," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 32(4), pages 645-660, July.
  23. 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.
  24. Ros, Jaime & Skott, Peter, 1998. "Dynamic Effects of Trade Liberalization and Currency Overvaluation under Conditions of Increasing Returns," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(4), pages 466-89, September.
  25. Dani Rodrik, 2008. "The Real Exchange Rate and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 365-439.
  26. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
  27. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," International Finance 9707001, EconWPA.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Martin Rapetti & Peter Skott & Arslan Razmi, 2011. "The Real Exchange Rate and Economic Growth: are Developing Countries Different?," UMASS Amherst Economics Working Papers 2011-07, University of Massachusetts Amherst, Department of Economics.
  2. 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.
  3. 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.
  4. Roberto Frenkel & Martin Rapetti, 2010. "A Concise History of Exchange Rate Regimes in Latin America," UMASS Amherst Economics Working Papers 2010-01, University of Massachusetts Amherst, Department of Economics.
  5. Razmi, Arslan & Hernandez, Gonzalo, 2011. "Can Asia Sustain an Export-Led Growth Strategy in the Aftermath of the Global Crisis? An Empirical Exploration," ADBI Working Papers 329, Asian Development Bank Institute.
  6. Fabrício Misso & Ricardo Araújo Azevedo & Frederico Jayme Jr, 2013. "An extended structural economic dynamics approach to balance-of-payments constrained growth: level of the real exchange rate and endogenous elasticities," Textos para Discussão Cedeplar-UFMG 499, Cedeplar, Universidade Federal de Minas Gerais.
  7. Gonzalo Hernandez & Arslan Razmi, 2011. "Can Asia Sustain an Export-Led Growth Strategy in the Aftermath of the Global Crisis? An Empirical Exploration," UMASS Amherst Economics Working Papers 2011-29, University of Massachusetts Amherst, Department of Economics.
  8. 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.
  9. 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.
  10. Bonatti, Luigi & Fracasso, Andrea, 2013. "Regime switches in the Sino-American co-dependency: Growth and structural change in China," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 1-32.
  11. Arslan Razmi, 2013. "Correctly Analyzing the Balance of Payments Constraint on Growth," UMASS Amherst Economics Working Papers 2013-12, University of Massachusetts Amherst, Department of Economics.
  12. Mario Cimoli & Gilberto Tadeu Lima, Gabriel Porcile, 2013. "The Production Structure, Exchange Rate Preferences and the Short Run – Medium Run Macrodynamics," Working Papers, Department of Economics 2013_12, University of São Paulo (FEA-USP).
  13. Razmi, Arslan, 2012. "The Exchange Rate, Diversification, and Distribution in a Modified Ricardian Model with a Continuum of Goods," ADBI Working Papers 337, Asian Development Bank Institute.
  14. Jimenez, Gonzalo Hernandez & Razmi, Arslan, 2013. "Can Asia sustain an export-led growth strategy in the aftermath of the global crisis? Exploring a neglected aspect," Journal of Asian Economics, Elsevier, vol. 29(C), pages 45-61.
  15. Bonatti, Luigi & Fracasso, Andrea, 2014. "Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth," MPRA Paper 54129, University Library of Munich, Germany.
  16. Couharde, Cécile & Sallenave, Audrey, 2013. "How do currency misalignments’ threshold affect economic growth?," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 106-120.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:streco:v:23:y:2012:i:2:p:151-169. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.