Policy Target Exchange Rates for Developing and Emerging Economies: A Post Keynesian Analysis

This thesis contributes to the Post Keynesian literature by rethinking optimum exchange rates for developing and emerging economies (DEEs). It does so by concentrating on three main aspects: the derivation of a concept, the theory, and the empirics. The first contribution of this thesis deals with the development of the concept of the policy target. This thesis argues that the equilibrium concept can be interpreted as a policy target from a perspective that considers Keynes’ and Post Keynesian methodology and theory and its relevance for policymaking. Policy targets are conceived as long-period optimum states, which are ideal states from the point of view of production. The concept is a hypothetical construction in the sense that there is an assumption that the state of expectations remains constant as there will not be surprises. The second contribution of this thesis deals with the development of two policy target models for exchange rate analysis: Policy Target Exchange Rate (PTER) models. It builds on the New Developmentalism’s concept of the Industrial Equilibrium Exchange Rate (IEER), a competitive level of the exchange rate for industrial development, considering the structural pressures arising from financial factors in the context of DEEs and rising financial globalisation. It builds two concrete policy target exchange rate models that incorporate the structural pressures emanating from financial factors in DEEs. This thesis contends that policy target exchange rate models need to consider the distortions and pressure arising from the financial side and not only the real side as it is currently the state of the IEER model. The third contribution of this thesis deals with the empirical application of the PTER models. It proposes one possible way to address the issue of computing PTERs and applies the methodology to a set of countries with different experiences: Mexico, Brazil and South Korea. Specifically, it addresses further aspects and specificities to determine key normative inputs based on empirical analysis of the main macroeconomic variables.