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Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations
Journal of International Economics (2011)
  • Carlos Urrutia
  • Felipe Meza
The last twenty years have witnessed periods of sustained appreciations of the real exchange rate in emerging economies. The case of Mexico between 1988 and 2002 is representative of several episodes in Latin America and Central and Eastern Europe in which countries opening to capital flows experienced large appreciations accompanied by a significant reallocation of workers towards the non-tradable sector. We account for these facts using a two sector dynamic general equilibrium model of a small open economy with frictions to labor reallocation and two driving forces: (i) differential productivity growth across sectors (the Balassa-Samuelson effect), and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account together for 60% of the decline in the domestic relative price of tradables in Mexico and account for a large fraction of the observed reallocation of labor across sectors. The results are robust to the inclusion of terms of trade into the model. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, or import tariffs.
  • Financial liberalization; real exchange rate
Publication Date
November, 2011
Citation Information
Carlos Urrutia and Felipe Meza. "Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations" Journal of International Economics Vol. 85 Iss. 2 (2011)
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