Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations

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.

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Year of publication:	2010-03-01
Authors:	Meza, Felipe ; Urrutia, Carlos
Institutions:	International Monetary Fund (IMF)
Subject:	Economic models \| Exchange rate appreciation \| Government expenditures \| Import tariffs \| Production growth \| Real effective exchange rates \| Reserves accumulation \| Terms of trade \| Workers remittances \| tradable goods \| relative price \| terms of trade shocks \| open economy \| trade shocks \| net exports \| price level \| elasticity of substitution \| relative prices \| equilibrium model \| trade deficit \| real interest rate \| real exchange rates \| gdp deflator \| domestic demand \| import tariff \| political economy \| foreign exchange \| factor shares \| current account deficit \| product differentiation \| transition path \| external financing \| free trade agreements \| tariff reduction \| domestic prices \| imperfect competition \| domestic banks \| price of imports \| nontradable goods \| country of origin \| trade liberalization \| exporting countries \| domestic price \| investment goods \| intermediate goods \| exchange rate movements \| effective exchange rates \| tradable goods sectors \| trade deficits \| perfect substitutes \| tariff reductions \| domestic market \| exogenous shock \| free trade \| changes in prices \| tariff cut

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Extent:	application/pdf
Series:	IMF Working Papers.
Type of publication:	Book / Working Paper
Language:	English
Notes:	The text is part of a series IMF Working Papers Number 10/63 4 pages long
Source:	RePEc - Research Papers in Economics

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