Roads and the Real Exchange Rate

Abstract

This paper studies the effect of transport infrastructure on the real exchange rate (RER) and reaches two relatively strong conclusions. First, while the list of robust determinants of the RER is not long, transport infrastructure belongs to that list. Many other potential determinants proposed in the literature, such as net foreign asset position or terms of trade, turn out to be not robust. Second, in terms of economic significance, the infrastructure effect follows closely the well-known Balassa-Samuelson effect and is one of the most important explanatory variables for RER movements, especially in developing countries.