Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/64171
Authors: 
Razmi, Arslan
Rapetti, Martin
Skott, Peter
Year of Publication: 
2011
Series/Report no.: 
Working Paper, University of Massachusetts, Department of Economics 2011-08
Abstract: 
Recent empirical studies have found a robust correlation between competitive exchange rates and economic growth in developing economies. This paper presents (i) a formal model to help explain these findings and (ii) econometric evidence on the relation between investment and the real exchange rate. The model emphasizes the existence of (hidden) unemployment as a source of endogenous growth, even under constant returns to scale. Growth promoting policies, however, affect the external balance, and two instruments are needed in order to achieve targets for both the growth rate and the trade balance. The real exchange rate can serve as one of those instruments. The implications of the model for the relation between real exchange rates and the rate of capital accumulation find support in our econometric analysis.
Subjects: 
real exchange rates
underemployment
capital accumulation
JEL: 
F43
O11
O41
Document Type: 
Working Paper

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