Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations

Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations
Author: Carlos Urrutia
Publisher: International Monetary Fund
Total Pages: 42
Release: 2010-03-01
Genre: Business & Economics
ISBN: 1451982070

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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.

Real Exchange Rate Appreciation in Emerging Markets

Real Exchange Rate Appreciation in Emerging Markets
Author: Marialuz Moreno Badia
Publisher: International Monetary Fund
Total Pages: 23
Release: 2014-01-10
Genre: Business & Economics
ISBN: 1475525052

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A number of emerging markets have experienced substantial real exchange rate appreciation in recent years, generating concerns about competitiveness and prompting policymakers to respond with a combination of mitigating policies. This paper shows that fiscal policy can play a role in alleviating these pressures. Using a sample of 28 emerging market economies over 1983-2011, we estimate a dynamic model of the real exchange rate and find that a permanent fiscal adjustment may reduce appreciation pressures over the long term. Furthermore, the composition of public spending matters, with reductions in current spending playing a key role. To illustrate the importance of these findings, the paper focuses on the case of Brazil. Our results suggest that maintaining fiscal discipline while increasing public investment in Brazil is likely to ease real appreciation pressures, highlighting the importance of tackling long-standing budget rigidities.

When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth

When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth
Author: International Monetary Fund
Publisher: International Monetary Fund
Total Pages: 34
Release: 2010-12-01
Genre: Business & Economics
ISBN: 1455210781

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We review the literature on Dutch disease, and document that shocks that trigger foreign exchange inflows (such as natural resource booms, surges in foreign aid, remittances, or capital inflows) appreciate the real exchange rate, generate factor reallocation, and reduce manufacturing output and net exports. We also observe that real exchange rate misalignment due to overvaluation and higher volatility of the real exchange rate lower growth. Regarding the effect of undervaluation of the exchange rate on economic growth, the evidence is mixed and inconclusive. However, there is no evidence in the literature that Dutch disease reduces overall economic growth. Policy responses should aim at adequately managing the boom and the risks associated with it.

Trade Liberalization and Real Exchange Rate Movement

Trade Liberalization and Real Exchange Rate Movement
Author: Ms.Xiangming Li
Publisher: International Monetary Fund
Total Pages: 39
Release: 2003-06-01
Genre: Business & Economics
ISBN: 1451854749

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Although theory suggests that the real exchange rate should depreciate after a credible trade liberalization but could appreciate temporarily with a noncredible one, little empirical evidence exists. Unlike existing studies that use either indirect tests or unreliable openness measures, this paper uses an event study based on carefully documented trade liberalization in 45 countries. The result shows that real exchange rates depreciate after countries open their economies to trade. In countries with multiple liberalization episodes, however, real exchange rates appreciate during early episodes, suggesting that partial or noncredible trade liberalizations are associated with real appreciation.

Fiscal Policy and the Real Exchange Rate

Fiscal Policy and the Real Exchange Rate
Author: Mr.Santanu Chatterjee
Publisher: International Monetary Fund
Total Pages: 40
Release: 2012-02-01
Genre: Business & Economics
ISBN: 146393713X

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Government spending on infrastructure has recently increased sharply in many emerging-market economies. This paper examines the mechanism through which public infrastructure spending affects the dynamics of the real exchange rate. Using a two-sector dependent open economy model with intersectoral adjustment costs, we show that government spending generates a non-monotonic U-shaped adjustment path for the real exchange rate with sharp intertemporal trade-offs. The effect of government spending on the real exchange rate depends critically on (i) the composition of public spending, (ii) the underlying financing policy, (iii) the intensity of private capital in production, and (iv) the relative productivity of public infrastructure. In deriving these results, the model also identifies conditions under which the predictions of the neoclassical open economy model can be reconciled with empirical regularities, namely the intertemporal relationship between government spending, private consumption, and the real exchange rate.

Trade and Domestic Financial Market Reform Under Political Uncertainty

Trade and Domestic Financial Market Reform Under Political Uncertainty
Author: Ms.Rina Bhattacharya
Publisher: INTERNATIONAL MONETARY FUND
Total Pages: 34
Release: 2000-10-01
Genre: Business & Economics
ISBN: 9781451858747

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This paper presents a model that incorporates uncertainty about trade reform and analyzes the effects of trade and financial liberalization on domestic investment and savings, the current account balance and the real exchange rate, both when the capital account is open and when it is closed. Under certain assumptions financial liberalization leads to a movement of resources in the opposite direction to that implied by trade liberalization and to real exchange rate appreciation, thus defeating one of the objectives of tariff reform, when the capital account is open. When political economy linkages are taken into account, however, the indirect effects of financial liberalization may offset the direct effects, encouraging a movement of resources in the desired direction. With a closed capital account these results should still hold unless there are strong negative income effects from trade reform.

Exchange Rate Policy, the Real Exchange Rate, and Inflation

Exchange Rate Policy, the Real Exchange Rate, and Inflation
Author: Miguel Alberto Kiguel
Publisher:
Total Pages: 40
Release: 1992
Genre: Foreign exchange
ISBN:

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Attempts to achieve real depreciation through continuous devaluation or by accelerating the rate of crawl - when not supported by changes in other policies and in the underlying conditions - usually end up increasing inflation, yet remain ineffective in changing the real exchange rate.

NBER Macroeconomics Annual 1995

NBER Macroeconomics Annual 1995
Author: Ben S. Bernanke
Publisher: MIT Press
Total Pages: 364
Release: 1996
Genre: Business & Economics
ISBN: 9780262522052

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Contents : Wage Inequality and Regional Unemployment Persistence: U.S. vs. Europe, Guiseppe BErtola and Andreas Ichino. Capital Utilization and Returns to Scale, Craig Burnside, Martin Eichenbaum, and Sergio Rebelo. Banks and Derivatives, Gary Gorton and Richard Rosen. Exchange-Rate-Based Stabilizations: Theory and Evidence, Sergio Rebelo and Carlos Vegh. Inflation Indicators and Inflation Policy, Stephen Cecchetti. Recent Central Bank Reforms and the Role of Price Stability as the Sole Objective of Monetary Policy, Carl Walsh. Is Central Bank Independence (and Low Inflation) the Result of Effective Financial Opposition to Inflation?, Adam Posen. The Unending Quest for Monetary Salvation, Stanley Fischer.

Inflation Targeting and Exchange Rate Management In Less Developed Countries

Inflation Targeting and Exchange Rate Management In Less Developed Countries
Author: Mr.Marco Airaudo
Publisher: International Monetary Fund
Total Pages: 65
Release: 2016-03-08
Genre: Business & Economics
ISBN: 1475523165

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We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy where macroeconomic fluctuations can be driven by self-fulfilling expectations. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank leans heavily against the wind in a managed float.