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The Real Exchange Rate and Development - Theory, Evidence, Issues, and Challenges

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  • Raphael Gouvea

    (Institute for Applied Economic Research (IPEA); Department of Economics, University of Massachusetts Amherst)

Abstract

This paper surveys the theoretical and empirical literature on the effects of the real exchange rate (RER) on international trade, economic development and growth. We summarize the main conceptual issues, discuss the relevance of the RER as an instrument of development policy, provide an overview of the macroeconomic and microeconomic mechanisms that link the RER to trade and long run growth and development, analyze the challenges – especially the disconnect between theory and data -- that often arise in empirical applications, and present new avenues for future research. In the process, we present some updated estimates and illustrative figures. The mechanisms through which the RER influences long-run growth and structural change outcomes remains a promising area of research and the relevance of individual channels in different contexts deserves much more careful investigation. Greater data availability should help fill some of these gaps in our understanding.

Suggested Citation

  • Raphael Gouvea, 2020. "The Real Exchange Rate and Development - Theory, Evidence, Issues, and Challenges," UMASS Amherst Economics Working Papers 2020-06, University of Massachusetts Amherst, Department of Economics.
    • Handle: RePEc:ums:papers:2020-06
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    File URL: https://scholarworks.umass.edu/econ_workingpaper/289/
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    More about this item

    Keywords

    Real exchange rate; Economic development; Structural change; Economic growth; International trade;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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