Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations

41 Pages Posted: 22 Mar 2010

See all articles by Carlos Urrutia

Carlos Urrutia

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica

Felipe Meza

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Análisis e Investigación Económica

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

Suggested Citation

Urrutia, Carlos and Meza, Felipe, Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations (March 2010). IMF Working Paper No. 10/63, Available at SSRN: https://ssrn.com/abstract=1574612

Carlos Urrutia (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica ( email )

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10370
Mexico

Felipe Meza

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Análisis e Investigación Económica ( email )

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10700
Mexico

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