Industrial policy and exchange rate skepticism

Luiz Carlos Bresser-Pereira and Fernando Rugitsky

Cambridge Journal of Economics, 11.08.2017. Working Paper Series 2016/08, Department of Economics, FEA-USP. Paper presented to the FMM - Research Network on Macroeconomics and Macroeconomic Policy annual conference, Berlin, October 22-24, 2015.

The aim of the present paper is to put in historical perspective the development thinking on the relationship between industrial and exchange rate policies. The first section focuses on the thought of the so-called pioneers of development economics, specifically their preference for protectionism and their belated recognition that an exchange-rate policy could act as a substitute to it. In the second one, we analyze the exchange rate skepticism that arises out of the theories that identify a foreign constraint to growth, in addition to the one revealed by the pioneers. The third section briefly complements the previous discussion with reference to macroeconomic formulations that allow for short-run contractionary effects of a devaluation, reinforcing the skepticism in question. In the fourth section, we discuss the revival of development thinking in the 1980s and its discussion about East Asian trajectories, a literature that placed great emphasis on industrial policy. Finally, in the fifth section we discuss the new historical facts and the new development macroeconomics' models that are putting an end to exchange rate skepticism.

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