Real Exchange Rate Policies for Economic Development

Working Paper No. 23868 This paper analyzes the role of real exchange rate (RER) policies in promoting economic development. Markets provide a suboptimal amount of investment in sectors characterized by learning spillovers. We show that a stable and competitive RER policy may correct for this extern...

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Bibliographic Details
Published in:NBER Working Paper Series 2017-09, p.23868
Main Authors: Guzman, Martin, Ocampo, Jose Antonio, Stiglitz, Joseph E
Format: Article
Language:English
Subjects:
Commodities
Competition
Developing countries
Diversification
Economic development
Economic growth
Economic models
Economic theory
Emerging markets
Foreign exchange markets
Foreign exchange rates
International finance
LDCs
Macroeconomics
Monetary policy
School finance
Subsidies
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Summary:Working Paper No. 23868 This paper analyzes the role of real exchange rate (RER) policies in promoting economic development. Markets provide a suboptimal amount of investment in sectors characterized by learning spillovers. We show that a stable and competitive RER policy may correct for this externality and other related market failures. The resulting development of these sectors leads to overall faster economic growth. A system of effectively multiple exchange rates is required when spillovers across different tradable sectors differ. The impact of RER policies is increased when they are complemented by traditional industrial policies that increase the elasticity of the aggregate supply to the RER. Among the instruments required to implement a stable and competitive RER are interventions in the foreign exchange market and regulation of capital flows. We also discuss the trade-offs associated with alternative stable and competitive RER policies.
ISSN:0898-2937
DOI:10.3386/w23868