Financial liberalization, structural change, and real exchange rate appreciations

► We identify sources of real appreciation and labor reallocation in emerging markets. ► We use a two-sector neoclassical growth model of a small open economy. ► One source is the decline in the real interest rate faced in international markets. ► Another source is differential TFP growth across tradable and non-tradable sectors. ► The interest rate channel proves to be quantitatively the most important.