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Walking the tightrope of real exchange rate policy for development: the roles of targets, instruments, and saving rates

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  • Arslan Razmi

Abstract

Real exchange rate policy can potentially be utilized to target the trade balance and/or development through capital accumulation. However, the presence of distributional conflict and the tradeoff between current and future trade imbalances complicates matters. For example, steps that address development/external account issues may influence income distribution in socially unacceptable ways. Comparative studies of the East Asian and Latin American development experiences serve to highlight this issue. I show that policy assignment matters for dynamic stability, that is, the simultaneous achievability of multiple targets. Moreover, the relative saving behavior of different functional income groups influences dynamic behavior. The analysis sheds light on why real exchange rate policy may often be infeasible, even if desirable from a developmental perspective.

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  • Arslan Razmi, 2021. "Walking the tightrope of real exchange rate policy for development: the roles of targets, instruments, and saving rates," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 44(4), pages 623-642, October.
    • Handle: RePEc:mes:postke:v:44:y:2021:i:4:p:623-642
    DOI: 10.1080/01603477.2020.1840278
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    Cited by:

    1. Palazzo, Gabriel & Rapetti, Martín, 2023. "From macro to micro and macro back: Macroeconomic trade elasticities in a developing economy," Structural Change and Economic Dynamics, Elsevier, vol. 65(C), pages 223-252.
    2. Ugurlu, Esra Nur & Razmi, Arslan, 2023. "Political economy of real exchange rate levels," Journal of Comparative Economics, Elsevier, vol. 51(3), pages 918-940.

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