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Exchange Rate, Income Distribution and Technical Change in a Balance-of-Payments Constrained Growth Model

Accepted version
Peer-reviewed

Type

Article

Change log

Authors

Ribeiro, RSM 
McCombie, JSL 
Lima, GT 

Abstract

This article develops a formal model that accounts for the net effect of an exchange rate devaluation on the long-term balance-of-payments constrained growth rate. Such a model investigates how a currency devaluation impacts on the home country non-price competitiveness via changes in income distribution and the rate of technological innovation. The model is built upon two plausible hypotheses. First, it is assumed that the rate of technological innovation is directly related to the income elasticity of demand for exports and inversely related to the income elasticity of demand for imports. Second, it is assumed that a redistribution of income between labor and capital has an ambiguous direct impact on the income elasticities ratio. The model shows that the net impact of a currency devaluation on growth can go either way depending on the institutional framework of the economy.

Description

Keywords

balance-of-payments constrained growth, income distribution, real exchange rate, technological change

Journal Title

Review of Political Economy

Conference Name

Journal ISSN

0953-8259
1465-3982

Volume Title

28

Publisher

Informa UK Limited