Ibrahim Elbadawi; Isaac Martínez
Abstract: Economic growth is significantly slower in fragile environments and twice as volatile as in other emerging economies. Backwardness also shows in exports, which have remained stagnant and non-diversified since the 1980s. We revisit the role of exchange regimes in fostering exports and economic growth and, thereby, in reducing political fragility. We use a DSGE model tailored to replicate key features of fragile economies: presence of frictions in market adjustment and learning, influence of external shocks, and the crucial role of governments in providing public investment and delivering social transfers to the population. Our DSGE model allows us to track the response of variables associated with fragility to shocks that are likely to be important in fragile economies. The simulations we perform below illustrate the types of general-equilibrium interactions that may complicate the analysis of the effects of shocks that typically affect fragile economies on endogenous
variables that may influence fragility.
Keywords: Fragile economies, learning by exporting, exchange regimes, DSGE model.
JEL Classification: D72, O24, F41, C68