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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 10/63, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/63
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    1. Cashin, Paul & Cespedes, Luis F. & Sahay, Ratna, 2004. "Commodity currencies and the real exchange rate," Journal of Development Economics, Elsevier, vol. 75(1), pages 239-268, October.
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    Cited by:

    1. 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.
    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. repec:eee:asieco:v:50:y:2017:i:c:p:27-45 is not listed on IDEAS
    4. Gete, Pedro, 2015. "Housing demands, savings gluts and current account dynamics," Globalization and Monetary Policy Institute Working Paper 221, Federal Reserve Bank of Dallas, revised 01 Aug 2015.
    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. 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).
    7. 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.
    8. Guven, Cahit, 2016. "Financial integration: The role of tradable and non-tradable goods," Economic Modelling, Elsevier, vol. 53(C), pages 345-353.
    9. 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.
    10. Branko Milanovic & 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, pages 47-67, August.
    11. 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.
    12. Carlos A. Ibarra, 2013. "Capital Flows and Private Investment in Mexico," Economía Mexicana NUEVA ÉPOCA, , vol. 0(3, Cierre), pages 65-99.

    More about this item

    Keywords

    Economic models; Exchange rate appreciation; Reserves accumulation; Real effective exchange rates; Production growth; Government expenditures; Import tariffs; Mexico; Terms of trade; Trade liberalization; Workers remittances; Real Exchange Rate; Appreciation; Financial Liberalization; Structural Change; tradable goods; relative price; terms of trade shocks; Open Economy Macroeconomics; Economic Growth and Aggregate Productivity: General;

    JEL classification:

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

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