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Integration, real exchange rate and growth

Author

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  • Karine Gente

    (DEFI - Centre de recherche en développement économique et finance internationale - GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Carine Nourry

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

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.

Suggested Citation

  • Karine Gente & Carine Nourry, 2011. "Integration, real exchange rate and growth," Working Papers halshs-00643043, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00643043
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00643043
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    References listed on IDEAS

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