| This dissertation collects three papers on the real exchange rate. The fisrt paper of this disertation develops a classical political economy framework put forth by Anwar Shaikh. Unlike mainstream theories which focus on relative consumer or producer prices, we argue that the real relative unit labor cost is the center of gravity or main force that explains the long-run behavior of the real exchange rate. Therefore, in our view, international competition is driven mainly by real cost differences between countries. The paper further argues that capital inflows, triggered by positive real interest rate differentials, could create short-run deviations of the real exchange rate from its center of gravity. Our econometric results using the ARDL-ECM framework confirmed the main hypothesis of this paper for 16 OECD countries, Taiwan, and 3 developing countries.;The second paper presents a case study of the Mexican-U.S. real exchange rate. In this paper we argue that the relative unit labor cost of the Mexican and US manufacturing sectors is a good indicator of the real exchange rate. Our econometric models show evidence that these two variables, as well as the real net capital inflows to Mexico and the government final consumption expenditures, are structurally related. However, for the period 1983-2011, we showed that the real relative unit labor cost ratio is the most important variable in explaining the long-run bahavior of the Mexican real exchange rate.;The third paper assesses the effects of an undervalued currency on economic growth. Here, I revert to the standard theory of real exchange rates (as opposed to the classical one adopted in the first two chapters), namely that the real exchange rate is in equilibrium when the balance of trade is zero. This is the foundation for Rodrik's PPP undervaluation index. Following him, I extend and apply his approach to a variety of countries. Our econometric results suggest that real exchange rate undervaluation has, to differing degrees, been able to enhance the economic growth of developed and developing countries. Nevertheless, when we disaggregate the main components of aggregate demand for different clusters of developed and developing countries using the Stock Flow Consistent approach (SFC), we find that in general, an undervalued currency has expansionary and contractionary effects in the short-run, specifically via the export sector and the level of aggregate consumption, respectively. This paper also estimates the effects of an undervalued currency on the level of investment and the trade balance. |
