Essays on real Exchange rate and competitiveness

Abstract

In the planning of a country's economic policy, exchange rate policy has a major role, especially in less developed countries where industrial policies and foreign trade are mainly based on the exchange rate competitiveness. Therefore, it is not surprising that the exchange rate policy is used by governments and policy makers to assess the country's competitive position in the world trade. In practice, the real exchange rate (RER) is associated with the evaluation of the external position of countries through the price elasticity analysis between exports and imports. However, the assessment of countries competitive position on the basis of price elasticity is a simplified overview for understanding reality. Despite the research efforts made to cast light on the field of concern, a causal relationship between the behavior of the RER and highest competitiveness indicators remain unclear. In fact, this relationship disregards the effects of non-price competitiveness, such as competitive advantages based on the value added like high technologies applied to new products developments and new processes designs. To round up, some authors and policy makers support the assumption that the overvaluation of a currency deteriorates the competitive position of a country and that competitive devaluations facilitate growth through its positive impact on the share of the tradable goods in the economy, especially in the industry. Nevertheless, there is vast empirical evidence supporting that an appreciation of the RER will not always result in a loss of competitiveness and, conversely, RER depreciation will not always imply a higher competitiveness performance. Thus, competitiveness policies strongly based on the RER evolution through time can lead to misleading conclusions. This thesis is focused on the effects of the real exchange rate as an instrument of macroeconomic policy aimed at achieving higher indicators of competitiveness in the business sector. Theoretical and empirical evidence is offered to business decision-makers as useful information.