2026 General Seminar - William Witheridge (Maryland)

The Exchange Rate as an Industrial Policy

Abstract:  We study the role of exchange rates in industrial policy. We construct an open-economy macroeconomic framework with Marshallian production externalities and imperfect capital mobility, and provide conditions under which foreign exchange interventions that keep the currency undervalued can improve welfare. A quantitative analysis applied to China’s growth take-off shows that the observed foreign exchange interventions significantly increased output growth. Our analysis shows that in economies featuring a dynamic path of externalities, the optimal exchange rate industrial pol- icy can lead to sizable welfare gains, especially when combined with time-invariant conventional industrial policies. https://willwitheridge.com/s/OPW_Paper.pdf