The tendency to the cyclical overvaluation of the exchange rate and its relation with the rate of investment and the structural change in Latin American countries

• Grant number: 19/01353-0
• Support Opportunities: Regular Research Grants
• Start date: August 01, 2019
• End date: January 31, 2022
• Field of knowledge: Applied Social Sciences - Economics - Growth, Fluctuations and Economic Planning
• Principal Investigator: Luiz Carlos Bresser Gonçalves Pereira
• Grantee: Luiz Carlos Bresser Gonçalves Pereira
• Host Institution: Escola de Administração de Empresas de São Paulo (EAESP). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil
• Associated researchers: Carmem Aparecida do Valle Costa Feijo ; Eliane Cristina de Araujo Sbardellati ; Gonzalo Hernandez Jimenez ; Guilherme Riccioppo Magacho ; Gustavo Andrey de Almeida Lopes Fernandes ; Ilán Baruch Bizberg ; JUAN CARLOS MORENO BIRD ; MARTIN GERVASIO RAPETTI ; Nelson Marconi
• Associated scholarship(s): 19/22475-7 - The tendency to the cyclical overvaluation of the exchange rate and its relation with the rate of investment and the structural change in Latin American countries, BP.TT

Abstract

This research aims to answer two central questions for financial stability and economic development: 1.Is there a tendency to cyclical and chronic overvaluation of the exchange rates in Latin American countries?2.If so, is the exchange rate a determinant of the investment rate? What about its influence over structural change, required for economic development?Thus, in addition to analyzing whether there is a trend towards overvaluation in a group of countries in the region, we will also analyze if this behavior influences the investment decision and the structural changes, understood as the sectoral changes in the composition of employment and value added, which are relevant to determining the productivity and the process of economic development of a country.The two issues that will be studied in this research project are central to New Developmentalism - a theoretical system that a group of economists, mainly Brazilians, have been developing since the beginning of the 2000s. This system has, as basic components, a new development macroeconomics and a political economy for medium-income countries. We will therefore discuss and try to demonstrate that the ideas developed within the scope of the new developmental theory can be empirically proved in Latin American countries.The new developmentalism asserts that middle-income countries often face a tendency to cyclical and chronic overvaluation of the exchange rate that keeps the country's national currency appreciated in the long run. This trend would be particularly true in Latin American countries. Two direct causes would cause the tendency to cyclical appreciation of the exchange rate: a Dutch disease not properly neutralized and a high interest rate (with a positive differential in relation to the international interest rate) that attracts foreign capital and, therefore, makes possible two economic policies which are common but do not appear to have been successful in developing countries from the standpoint of stability and economic growth, namely the growth policy through foreign indebtedness or external savings and the adoption of a currency anchor to control inflation.The exchange rate appreciation cycle starts and ends with a financial crisis. At the beginning, there is a balance of payments crisis, which causes a huge exchange rate depreciation. It is followed by a process of appreciation reaching a floor that lasts for a large period until the amount of the external debt causes the external creditors to lose confidence, generating a new balance of payments crisis to end the cycle, causing a new sudden depreciation.The main goal of this research project is to check if those cycles really exist, since 1950, in four Latin-America economies: Argentina, Brazil, Mexico and Colombia. Since those countries are exposed to the Dutch disease, which is not neutralized, and maintain high interest rates, especially on the last decades, those countries will necessarily have their currencies overvalued over those cycles.In addition to that, since those Latin American countries have grown less since 1980, they have also invested less (Colombia is an exception) and have shown signs of regression on their industrialization processes, that is, they have focused their investments, production and jobs to sectors with lower value added, we are going to investigate if the tendency to exchange rate appreciation is a factor that contributes to this pattern of low investment and growth and deterioration of the productive structure that has been observed in the Latin American countries. The analysis of these two research goals - the tendency to overvaluation of the currency and its impact on investment and structural change - is highly relevant because it can aid to determine suitable development strategies for the Latin American countries. (AU)

Scientific publications

(References retrieved automatically from Web of Science and SciELO through information on FAPESP grants and their corresponding numbers as mentioned in the publications by the authors)

MARCONI, NELSON; ARAUJO, ELIANE; BRANCHER, MARCO CAPRARO; PORTO, TIAGO COUTO. he relationship between exchange rate and structural change: an approach based on income elasticities of trad. CAMBRIDGE JOURNAL OF ECONOMICS, v. 45, n. 6, p. 1297-1318, NOV 2021. (19/01353-0)

NELSON MARCONI; GUILHERME MAGACHO; JOÃO GUILHERME R. MACHADO; RAFAEL DE AZEVEDO RAMIRES LEÃO. Margens de lucro, taxas de câmbio e mudança estrutural: evidências empíricas para o período 1996-2017. Rev. Econ. Polit., v. 40, n. 2, p. 285-309, 2020-04-17. (19/01353-0)