Trade, real exchange rate, and growth

Abstract

We develop an endogenous growth model with three goods, exportable, importable
and non-tradable. We study the response of the real exchange rate and of
the economy growth rate to a decrease in the tariff rate. We show that trade
liberalization must be followed by a depreciation of the real exchange rate. We
deduce that the growth rate of the economy increases in the long run. We affirm
that the Mexican economy did not follow this behavior in the period after the
trade liberalization, so the result was a deficient economic growth.