The real exchange rate as a target of macroeconomic policy

Frenkel, Roberto and Rapetti, Martin (2014): The real exchange rate as a target of macroeconomic policy.

Abstract

In recent years several authors have argued that developing countries should aim to target a stable and competitive real exchange rate (SCRER) to foster economic growth. A growing body of empirical research gives support to this claim. Although more theoretical work is needed, some ideas from development theory can help to explain the empirical findings. For instance, if modern tradable activities display some form of increasing returns to scale, market forces alone would deliver a set of relative prices that would make capital accumulation in these activities suboptimal. This paper supports the view that developing countries could target SCRER as a part of a development strategy that promotes the expansion of modern tradable activities. We review the empirical findings, discuss the channels through which a SCRER can stimulate economic growth, and describe the policies needed to pursue a strategy based on a SCRER.

• Item Type: MPRA Paper
• Language: English
• Keywords: Real exchange rate, development, macroeconomic policy
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

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