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Economic Adjustment and Exchange Rates in Developing Countries

  • Economics


Economic Adjustment and the Real Exchange Rate This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Economic Adjustment and Exchange Rates in Developing Countries Volume Author/Editor: Sebastian Edwards and Liaquat Ahamed, eds. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-18469-2 Volume URL: Publication Date: 1986 Chapter Title: Economic Adjustment and the Real Exchange Rate Chapter Author: Arnold Harberger Chapter URL: Chapter pages in book: (p. 369 - 424) Economic Adjustment and IV the Real Exchange Rate This Page Intentionally Left Blank 11 Economic Adjustment and the Real Exchange Rate Arnold C . Harberger 11.1 Introduction and Summary At the time of this writing (July 1985) it is hardly necessary to try to motivate a study seeking to clarify the concept of the real exchange rate and to improve our understanding of the reasons for its movements. Among the major currencies, the Deutschmark has moved from a high of around .55 U.S. dollars in 1979 to a low of around $.30 in 1984-85. Over roughly the same period the British pound has fluctuated from more than two dollars down to barely over one. These movements far exceed the differential rates of inflation of the countries concerned. Real rates in both cases have exhibited swings spanning a factor of 1.5 or more. Even though those variations in the dollar/Deutschmark and the dollar/ pound exchange rates were greeted with widespread surprise and com- ment, they look minor when compared with the movements experi- enced by many less developed countries. For these countries, even after double deflation to correct for movements in their general price levels and in that of the United States, the observed range of variation of real exchange rates is nothing short of dramatic. For example, Mex- ico’s real exchange rate vis-&-vis the U.S

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