Integration, real exchange rate and growth

Karine Gente (1) , Carine Nourry (2)

1 DEFI - Centre de recherche en développement économique et finance internationale
2 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

This paper deals with the relationship between real exchange rate and growth in the process of economic integration. Using a 2x2x2 model of overlapping generations, we show that growth depends on the real exchange rate (RER) through human capital accu- mulation. Integration leads to convergence in growth rates only in presence of cross-border externalities in human capital. Otherwise, divergence is likely to occur and integration may be good (bad) for growth if the integrated RER is higher (lower) than the autarky's RER. In reality, since capital mobility prevents the real exchange rate from adjusting, economic inte- gration may lead to income divergence if countries are too different in terms of preference, altruism or productivity.

Mots clés: Two-sector model; OLG model; real exchange rate; economic growth

Domaines: Economies et finances

Karine Gente, Carine Nourry. Integration, real exchange rate and growth. 2011. ⟨halshs-00643043⟩