Critical Assessments of The General Theory
Edited by L. Randall Wray and Matthew Forstater
Chapter 15: Real Exchange Rate Levels, Investment and Growth: A Keynesian Perspective
Paulo Gala INTRODUCTION According to the ‘development approach’ to currency management (Williamson, 2003; Frenkel, 2004), relatively undervalued exchange rates have been a key factor in most East and Southeast Asian successful growth strategies. Chile, Uganda, Mauritius and Turkey in the 1980s and India and China in the 1990s have all beneﬁted from competitive real exchange rates, which fostered exports and output growth. However, most Latin American and African countries have suﬀered from severe balance-of-payments crises due to exchange rate overvaluation. Chile and Mexico in the early 1980s, as well as Mexico, Brazil and Argentina in the 1990s are good examples. Following the traditional Keynesian macroeconomic channel, an expansionary devaluation boosts exports, income and employment. Exchange rate management may also have strong impacts on savings levels as it determines paths of consumption and investment via real wage determination (Bresser-Pereira, 2004a). Also, an excessively overvalued currency could cause savings displacement. By stimulating the export sector, a relatively undervalued currency may help to avert ﬁnancial crises and put the economy on a more sustained developmental path. It is an important tool to promote the development of the tradable sector, which is usually very dynamic and contributes to innovations and productivity increases. Numerous studies have argued that most balance-of-payments crises are related to overvalued or misaligned currencies (Goldfajn and Valdes, 1996; Palma, 2003a). If Purchasing Power Parity does not hold in the short run (see Sarno and Taylor, 2002 for a discussion) exchange rate policy may therefore have important developmental and growth...
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