The real exchange rate and economic development

Arslan Razmi, Martin Rapetti and Peter Skott

Structural Change and Economic Dynamics, 2012, vol. 23, issue 2, 151-169

Abstract: Recent empirical studies have found a robust correlation between competitive exchange rates and economic growth in developing economies. This paper presents (i) a formal model to help explain these findings and (ii) econometric evidence on the relation between investment and the real exchange rate. The model emphasizes the existence of (hidden) unemployment as a source of endogenous growth, even under constant returns to scale. Growth promoting policies, however, affect the external balance, and two instruments are needed in order to achieve targets for both the growth rate and the trade balance. The real exchange rate can serve as one of those instruments. The implications of the model for the relation between real exchange rates and the rate of capital accumulation find support in our econometric analysis.

Keywords: Real exchange rates; Underemployment; Capital accumulation; Investment; Growth (search for similar items in EconPapers)
JEL-codes: F43 O11 O41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (82)

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Working Paper: The Real Exchange Rate and Economic Development (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:23:y:2012:i:2:p:151-169

DOI: 10.1016/j.strueco.2012.01.002

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