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Economic Liberalization and the Equilibrium Real Exchange rate in Developing Countries

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  • Sebastian Edwards

Abstract

This paper deals with the relation between commercial policy and "the" equilibrium real exchange rate. The paper clarifies the meaning of real exchange rate by comparing five different definitions that are currently found in the literature, The analysis focuses on the effects of an economic liberalization program that reduces import tariffs on the equilibrium real exchange rate under a number of alternative assumptions regarding capital mobility. From a policy perspective this is an important issue, since countries that embark on liberalization are usually concerned with avoiding real exchange rate misalignment and overvaluation. The effects of terms of trade shocks on the equilibrium real exchange rate are also investigated.

Suggested Citation

  • Sebastian Edwards, 1987. "Economic Liberalization and the Equilibrium Real Exchange rate in Developing Countries," NBER Working Papers 2179, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2179
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    1. Edmar Bacha & Lance Taylor, 1971. "Foreign Exchange Shadow Prices: A Critical Review of Current Theories," The Quarterly Journal of Economics, Oxford University Press, vol. 85(2), pages 197-224.
    2. Arnold Harberger, 1986. "Economic Adjustment and the Real Exchange Rate," NBER Chapters,in: Economic Adjustment and Exchange Rates in Developing Countries, pages 369-424 National Bureau of Economic Research, Inc.
    3. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
    4. Jones, Ronald W. & Peter Neary, J., 1984. "The positive theory of international trade," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 1, pages 1-62 Elsevier.
    5. Mayer, Wolfgang, 1974. "Short-Run and Long-Run Equilibrium for a Small Open Economy," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 955-967, Sept./Oct.
    6. Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 98-116.
    7. Hanson, James & de Melo, Jaime, 1985. "External shocks, financial reforms, and stabilization attempts in Uruguay during 1974-1983," World Development, Elsevier, vol. 13(8), pages 917-939, August.
    8. Edwards, Sebastian & Ahamed, Liaquat (ed.), 1986. "Economic Adjustment and Exchange Rates in Developing Countries," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226184692, June.
    9. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-848, December.
    10. Ethier, Wilfred, 1972. "Nontraded Goods and the Heckscher-Ohlin Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 132-147, February.
    11. Edwards, Sebastian & van Wijnbergen, Sweder, 1986. "The Welfare Effects of Trade and Capital Market Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 141-148, February.
    12. Sebastian Edwards & Liaquat Ahamed, 1986. "Economic Adjustment and Exchange Rates in Developing Countries," NBER Books, National Bureau of Economic Research, Inc, number edwa86-1, July.
    13. Neary, J Peter, 1978. "Short-Run Capital Specificity and the Pure Theory of International Trade," Economic Journal, Royal Economic Society, vol. 88(351), pages 488-510, September.
    14. Katseli, Louka T, 1983. "Devaluation: A Critical Appraisal of the IMF's Policy Prescriptions," American Economic Review, American Economic Association, vol. 73(2), pages 359-363, May.
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    Cited by:

    1. Olivier Peron & Serge Rey, 2012. "Trade and convergence of per capita income in the Indian Ocean Zone, 1950–2008," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 49(3), pages 657-683, December.
    2. Merle Holden, 1991. "Real Exchange Rates and their Measurement," South African Journal of Economics, Economic Society of South Africa, vol. 59(1), pages 1-8, March.
    3. Onur Koska, 2005. "Financial Liberalization Era in Turkey: Critique on Decree No.32," Macroeconomics 0506016, EconWPA.

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