DP970 Convergence, Competitiveness and the Exchange Rate

Author(s): Andrea Boltho
Publication Date: June 1994
Keyword(s): Bretton Woods, Competitiveness, Exchange Rates, Trade Liberalization
JEL(s): F43, N14
Programme Areas: Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=970

Standard theory predicts that exchange rate changes have merely temporary real effects. Yet, if the higher profits that a devaluation ensures are used to improve non-price competitiveness, longer-run effects are possible. The paper looks at the experience of Germany, Spain, France and Italy which, in the 1950s and 1960s, either benefited from low parities or devalued their currencies. Favourable exchange rates probably contributed to these countries' rapid growth, but so did trade liberalization. In today's Europe the scope for further trade liberalization is limited while the uncertainties introduced by floating exchange rates make successful devaluations less likely.