Real Exchange Rate Policies for Economic Development

38 Pages Posted: 2 Oct 2017

See all articles by Martin Guzman

Martin Guzman

Columbia University

Jose Antonio Ocampo

Columbia University

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: September 2017

Abstract

This paper analyzes the role of real exchange rate (RER) policies in promoting economic development. Markets provide a suboptimal amount of investment in sectors characterized by learning spillovers. We show that a stable and competitive RER policy may correct for this externality and other related market failures. The resulting development of these sectors leads to overall faster economic growth. A system of effectively multiple exchange rates is required when spillovers across different tradable sectors differ. The impact of RER policies is increased when they are complemented by traditional industrial policies that increase the elasticity of the aggregate supply to the RER. Among the instruments required to implement a stable and competitive RER are interventions in the foreign exchange market and regulation of capital flows. We also discuss the trade-offs associated with alternative stable and competitive RER policies.

Suggested Citation

Guzman, Martin and Ocampo, Jose Antonio and Stiglitz, Joseph E., Real Exchange Rate Policies for Economic Development (September 2017). NBER Working Paper No. w23868. Available at SSRN: https://ssrn.com/abstract=3046382

Martin Guzman (Contact Author)

Columbia University ( email )

2852 Broadway Street
New York, NY 10027
United States

Jose Antonio Ocampo

Columbia University

3022 Broadway
New York, NY 10027
United States

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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