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Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations

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  • Felipe Meza
  • Carlos Urrutia

Abstract

We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across sectors and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account for 60 percent of the decline in the relative price of tradable goods and explain a large fraction of the reallocation of labor across sectors. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, terms of trade, or import tariffs.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/63.

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Length: 40
Date of creation: 01 Mar 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/63

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Keywords: Economic models; Exchange rate appreciation; Government expenditures; Import tariffs; Production growth; Real effective exchange rates; Reserves accumulation; Terms of trade; Workers remittances; tradable goods; relative price; terms of trade shocks; open economy; trade shocks; net exports; price level; elasticity of substitution; relative prices; equilibrium model; trade deficit; real interest rate; real exchange rates; gdp deflator; domestic demand; import tariff; political economy; foreign exchange; factor shares; current account deficit; product differentiation; transition path; external financing; free trade agreements; tariff reduction; domestic prices; imperfect competition; domestic banks; price of imports; nontradable goods; country of origin; trade liberalization; exporting countries; domestic price; investment goods; intermediate goods; exchange rate movements; effective exchange rates; tradable goods sectors; trade deficits; perfect substitutes; tariff reductions; domestic market; exogenous shock; free trade; changes in prices; tariff cut;

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Cited by:
  1. Sangeeta Pratap & Carlos Urrutia, 2011. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Working Papers, Centro de Investigacion Economica, ITAM 1104, Centro de Investigacion Economica, ITAM.
  2. 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, Elsevier, vol. 25(C), pages 1-32.
  3. Lagoarde-Segot, Thomas & Leoni, Patrick L., 2013. "Pandemics of the poor and banking stability," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4574-4583.
  4. Luigi Bonatti & Andrea Fracasso, 2012. "The costs of rebalancing the China-US co-dependency," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 120(1), pages 59-106.
  5. Beker, Victor A., 2012. "A case study on trade liberalization: Argentina in the 1990s," Economics Discussion Papers 2012-3, Kiel Institute for the World Economy.
  6. Guyot, Alexis & Lagoarde-Segot, Thomas & Neaime, Simon, 2014. "Foreign shocks and international cost of equity destabilization. Evidence from the MENA region," Emerging Markets Review, Elsevier, Elsevier, vol. 18(C), pages 101-122.

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