Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations

Author/Editor: Urrutia, Carlos ; Meza, Felipe
Publication Date: March 01, 2010
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Summary: 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.
Series: Working Paper No. 10/63
Subject(s): 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

Author's Keyword(s): Real Exchange Rate | Appreciation | Financial Liberalization | Structural Change
Publication Date: March 01, 2010
Format: Paper
Stock No: WPIEA2010063 Pages: 40
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