Real Exchange Rate and the Structure of Exports

Abstract This paper discusses the effects of the real exchange rate (RER) on the structure of exports. Based on a North-South Ricardian model, two hypotheses are suggested and tested. The first one is that a higher RER allows for a higher diversification of exports. The second hypothesis is that this diversification raises the technological intensity of exports. We find favorable evidence for the two hypotheses from a panel data study including 111 counties in the period 1965-2005. From these results it is argued that a competitive RER should be considered a relevant variable in the process of economic development as it encourages the transformation of the pattern of specialization.