Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations
March 1, 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.
Subject: Labor, Real exchange rates, Terms of trade, Total factor productivity, Wages
Keywords: interest rate, WP
Pages:
40
Volume:
2010
DOI:
Issue:
063
Series:
Working Paper No. 2010/063
Stock No:
WPIEA2010063
ISBN:
9781451982077
ISSN:
1018-5941
