Real Exchange Rate And Economic Development

Over the past decade, the phenomenon of the coexistence of rapid economic growth, explosive rise in exports, a large accumulation of international reserves and the sustained management of foreign exchange market by the government emerges among those developing countries who have adopted an export-oriented economic growth model. One typical representative is China. Moreover, there are also signs of mild depreciation or even significant real exchange rate depreciation in these fast-growing developing countries. The above phenomenon indicates that these countries are likely to have managed to adopt the real exchange rate depreciation policy to drive long-term economic growth.On the basis of previous studies, this paper tries to explore the theoretical mechanism of this phenomenon, and do some further study in order to propose appropriate policy recommendations.In the third chapter, based on the two important economic facts in most developing countries, dual economic structure, and the existence and migration of surplus labor, this paper establishes a theoretical model for those dependent countries. On the one hand, a depreciation of the real exchange rate could stimulate output and employment in non-tradable sector, by expenditure switching effect and real wage effect, without affecting the output of tradable sector. On the other hand, by affecting capital accumulation, it can stimulate employment and output in tradable sector, expanding employment and output in non-tradable sector through the income effect. Played cumulative effect of devaluation of capital, with the investment depends on the stimulus.The influence of real exchange rate depreciation on capital accumulation relies on the coordination of investment incentives.Finally, based on the conclusions of the theoretical model and the reality of China, this paper presents the following policy recommendations:maintaining the real exchange rate devaluation policy, increasing investment incentives and with remove barriers on labor mobility.