Description:
<jats:p>Real Exchange Rates and Growth, Some Prospects for a Euro Zone in the Mediterranean Area </jats:p>
<jats:p>The coming of the euro will force South Mediterranean Countries (SMCs) to define their exchange rate policy with respect to the new currency. This paper examines their real exchange rate policy vis-à-vis the euro. The theoretical framework allows for an underdevelopment trap, that can be overcome thanks to a temporary variation in the real exchange rate. The long run growth rate can therefore be modified through a temporary exchange rate movement. The empirical analysis shows that, given their level of development, SMCs could use their real exchange rate to grow more rapidly. This would not necessarily adversely affect their European partners. Hence, SMCs should, above all, prevent any real overvaluation of their currencies.</jats:p>