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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.

Suggested Citation

  • Felipe Meza & Carlos Urrutia, 2010. "Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations," IMF Working Papers 2010/063, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2010/063
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    Cited by:

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    2. Emilio Espino & Martín González Rozada, 2015. "On the Implications of Taxation for Investment, Savings and Growth: Evidence from Brazil, Chile and Mexico," IDB Publications (Working Papers) 89116, Inter-American Development Bank.
    3. Pedro Gete, 2015. "Housing demands, savings gluts and current account dynamics," Globalization Institute Working Papers 221, Federal Reserve Bank of Dallas.
    4. 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 (IfW Kiel).
    5. Lagoarde-Segot, Thomas & Leoni, Patrick L., 2013. "Pandemics of the poor and banking stability," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4574-4583.
    6. 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.
    7. Carlos A. Ibarra, 2013. "Capital Flows and Private Investment in Mexico," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(3, Cierre), pages 65-99.
    8. Sangeeta Pratap & Carlos Urrutia, 2012. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 336-358, July.
    9. Huang, Yiping & Ji, Yang, 2017. "How will financial liberalization change the Chinese economy? Lessons from middle-income countries," Journal of Asian Economics, Elsevier, vol. 50(C), pages 27-45.
    10. Gabriela Cugat, 2019. "Emerging markets, household heterogeneity, and exchange rate policy," 2019 Meeting Papers 526, Society for Economic Dynamics.
    11. 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.
    12. Guven, Cahit, 2016. "Financial integration: The role of tradable and non-tradable goods," Economic Modelling, Elsevier, vol. 53(C), pages 345-353.
    13. 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, vol. 18(C), pages 101-122.
    14. Gete, Pedro, 2020. "Expectations and the housing boom and bust. An open economy view," Journal of Housing Economics, Elsevier, vol. 49(C).
    15. Carlos Villalobos Barría & Stephan Klasen & Sebastian Vollmer, 2016. "The Distribution Dynamics of Human Development in Mexico 1990–2010," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(S1), pages 47-67, August.
    16. Carlos A. Ibarra, 2015. "Investment and the real exchange rate's profitability channel in Mexico," International Review of Applied Economics, Taylor & Francis Journals, vol. 29(5), pages 716-739, September.

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    More about this item

    Keywords

    WP; interest rate;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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