Financial development, innovation, and the real exchange rate:
the case of Mexico and South Korea, 1970–2020
DOI:
https://doi.org/10.24275/Keywords:
Real exchange rate, Technological innovation, Productivity, Financial developmentAbstract
This study aims to analyze the implications of financial deepening, technological innovation, and cost structures on exchange rate dynamics. Using a dynamic panel model, the research evaluates the impact of financial structure, technological capacity, and unit labor costs (ULC) on the real exchange rate (RER) across 14 manufacturing subsectors in Mexico and South Korea from 1990 to 2020. The main findings reveal that: (i) ULC fluctuations exert mixed effects on the RER; (ii) in South Korea, financial dynamics contribute to reducing exchange rate volatility; and (iii) productivity shocks stabilize exchange rate parity in that country. Based on these results, the design of economic and financial policies aimed at boosting wages, fostering innovation rates, enhancing liquidity, and improving industrial efficiency is crucial to ensuring exchange rate stability.
JEL Classification: F31, E44, O16, O33.
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