Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations
41 Pages Posted: 22 Mar 2010
Date Written: March 2010
Abstract
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.
Keywords: Economic models, Exchange rate appreciation, Government expenditures, Import tariffs, Mexico, Production growth, Real effective exchange rates, Reserves accumulation, Terms of trade, Trade liberalization, Workers remittances
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