On Mixed Strategies for Development

Abstract

The paper investigates whether mixed trade strategies of import substitution and export promotion, if permanently or temporarily applied, can generate pro‐tradables movements in the real exchange rate. Static and dynamic general‐equilibrium modeling with a nontradables sector and alternative types of tradables is used to explore real exchange rate responses to uniform and nonuniform trade policy interventions. The paper shows that uniform, permanent interventions are neutral, having no impact on the equilibrium real exchange rate. The real exchange rate effect of temporary uniform interventions is, however, in general ambiguous when prices and incomes are fully endogenized. The breakdown of Lerner symmetry or of neutrality following uniform temporary interventions does not mean that intended promotion of tradables necessarily results in a pro‐tradables movement in the real exchange rate.