20 Years of Arnoldshain Seminar
“20 Years of Challenges for Integration, Globalization, and Development”
September 14 – 18, 2015
Frankfurt and Arnoldshain / Taunus

Zarzosa Valdivia, Fernando Enrique    
AbstracttitleReal Exchange Rate and Relative Factor Prices: A theoretical view of their interdependences
ShortabstractBased on a micro-founded model of a small open economy, this paper investigates the interdependences between the real exchange rate (defined as the relative tradable to non-tradable prices) and the relative factor price. On the one hand, the influence of the relative factor price on the real exchange rate is determined by the equilibrium of the goods markets (non-tradable goods sector market clearing conditions plus equilibrium of the current account). On the other hand, the equilibrium of the factor markets imply that the real exchange rates affect the relative factor price. When the goods and factor markets are in equilibrium, the real exchange rate and the relative factor price are determined. Consequently, this research also shows how this interdependences influence the channels by which productivity, factor endowments, terms of trade, government spending, debt services and transfers affect the equilibrium real exchange rate and relative factor price. The effect of economic policies should thus be evaluated by their influence in the interdependent and equilibrium relationships, which have not been studied yet by the current literature.