However, it is not without risks betting just on the RER for competitiveness. A high RER depresses real wages. To avoid a negative impact on workers’ welfare, it is necessary to boost relative productivity. To sustain both growth and income distribution, it is crucial to move the relative productivity curve to the right (full line). This would allow the developing economy to attain the degree of diversification z2 without changing the RER; or higher diversification in z3 if the RER increases. This is one of the many good reasons to believe that the exchange rate policy and industrial policy needs each other.
- Cimoli, M.; Fleitas, S. And Porcile, G. (2013) "Technological intensity of the export structure and the real exchange rate," Economics of Innovation and New Technology, vol. 22(4), pages 353-372, June.
- Baldwin, R. (1988) “Hysteresis in Import Prices: The Beachhead Effect”, American Economic Review, 78, pp. 773-785.
- Baldwin R., Krugman P. R. (1989) “Persistent Trade Effects of Large Exchange Rate Shocks, Quarterly Journal of Economics, 104, pp. 635-654.
- McMillan, M. and Rodrik, D. (2001) “Globalization, Structural Change and Productivity Growth”, Joint ILO-WTO paper, February.