scholarly journals Real exchange rate and structural change in a Kaldorian balance of payments constrained growth model

2018 ◽  
Vol 38 (1) ◽  
pp. 48-69
Author(s):  
BERNARDO MATTOS SANTANA ◽  
JOSÉ LUIS OREIRO
Keyword(s):  
Exchange Rate ◽  
Structural Change ◽  
Real Exchange Rate ◽  
Growth Model ◽  
Manufacturing Industry ◽  
Growth Models ◽  
Dynamic Properties ◽  
Output Growth ◽  
Balance Of Payments ◽  
Over Time

ABSTRACT The objective of the present article is to develop a Kaldorian Growth model that (i) had a balance of payments constraint, in order to eliminate the inconsistency of balance of payments growth models; and (ii) defines a precise mechanism by which the level of real exchange rate can affect long-term growth. An important innovation introduced in the model is the idea that Kaldor-Verdoorn coefficient - that measures the sensibility of growth rate of labor productivity to output growth - depends on the share of manufacturing output on GDP. This hypothesis allowed us to introduce the possibility of structural change, defined as a dynamic process by which the share of manufacturing industry on real output could change over time. In this case, it will be possible to analyze the dynamic properties of the model either in the case where productive structure is kept constant (case with no structural change), as in the case where it evolves over time as a result of some economic process (case with structural change).

scholarly journals A reconciliation proposal of demand-driven growth models in open economies

2017 ◽  
Vol 44 (2) ◽  
pp. 226-244 ◽  
Author(s):  
Rafael Saulo Marques Ribeiro ◽  
John S.L. McCombie ◽  
Gilberto Tadeu Lima
Keyword(s):  
Exchange Rate ◽  
Income Distribution ◽  
Growth Model ◽  
Growth Models ◽  
Open Economies ◽  
Balance Of Payments ◽  
Testable Hypothesis ◽  
Currency Devaluation ◽  
Content Type ◽  
Short Run

Purpose The purpose of this paper is to contribute to the literature on demand-driven Keynesian growth in open economies by developing a formal model that combines Dixon and Thirlwall’s (1975) export-led growth model and Thirlwall’s (1979) balance-of-payments constrained growth model into a more general specification. Then, based on the model developed in this paper, the authors analyse more broadly some important issues concerning the net impact of currency depreciation on the short-run growth. Design/methodology/approach The authors build upon Dixon and Thirlwall’s (1975) export-led growth model and Thirlwall’s (1979) balance-of-payments constrained growth model in order to develop the theoretical framework. The authors also run numerical simulations to illustrate the net impact of devaluation on the short-run growth rate in different scenarios. Findings The authors demonstrate that the net impact of currency devaluation on growth can go either way, depending on some structural conditions such as the average share of imported intermediate inputs in prime costs of domestic firms and the institutional capacity of trade unions to set nominal wages through the bargaining process. The model also shows that the effectiveness of a competitive real exchange rate to promote growth is higher in countries where the share of labour in domestic income is also higher. Research limitations/implications This paper provides a coherent formal starting-point for further theoretical developments on the interrelatedness between currency devaluation, income distribution and growth. These findings provide empirically testable hypothesis for future research. Originality/value The present study proposes an alternative formal solution for the theoretical problem of imposing a balance-of-payments constraint on the process of cumulative causation often incorporated in Kaldorian growth models. In terms of policy, the framework sheds further light on the relevance of income distribution and the labour market institutional framework for the dynamics of the exchange rate pass-through mechanism and allows us to map out related conditions under which currency devaluation can promote growth.

scholarly journals Capital accumulation, structural change and real exchange rate in a Keynesian-Structuralist growth model

2015 ◽  
Vol 62 (2) ◽  
pp. 237-256 ◽  
Author(s):  
José Oreiro ◽  
Fabricio Missio ◽  
Frederico Jayme
Keyword(s):  
Exchange Rate ◽  
Structural Change ◽  
Real Exchange Rate ◽  
Capital Accumulation ◽  
Growth Models ◽  
High Growth ◽  
High Growth Rate ◽  
Exchange Rate Policy ◽  
Long Run ◽  
State Growth

The aim of this paper is to show at theoretical level that maintaining a competitive real exchange rate positively affects the economic growth of developing countries by means of a Keynesian-Structuralist model that combines elements of Kaleckian growth models with the balance of payments constrained growth models pioneered developed by Thirlwall. In this setting, the level of real exchange rate is capable, due to its effect over capital accumulation, to induce a structural change in the economy, making endogenous income elasticities of exports and imports. For reasonable parameter values it is shown that in steady-state growth there is two long-run equilibrium values for real exchange rate, one that corresponds to an under-valued currency and another that corresponds to an over-valued currency. If monetary authorities run exchange rate policy in order to target a competitive level for real exchange rate, than under-valued equilibrium is stable and the economy will show a high growth rate in the long-run.

scholarly journals Endogeneity of the elasticities and the real exchange rate in a balance of payments constrained growth model: cross-country empirical evidence

2019 ◽  
Vol 5 (2) ◽  
pp. 214-238
Author(s):  
Renato S. Campos ◽  
Frederico Gonzaga Jayme Jr. ◽  
Gustavo Britto
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Income Elasticity ◽  
Growth Models ◽  
Balance Of Payments ◽  
Sustainable Growth ◽  
The Real ◽  
Income Elasticities ◽  
Sustainable Growth Rate ◽  
Cross Country

Balance of payments constrained growth models are notable for their longevity. This is especially true for the case of Thirlwall’s Law, which defines that a country’s sustainable growth rate is given by the ratio between the income elasticity of exports and that of imports. In light of this, the current paper explores the hypothesis that the income elasticities of this type of models are endogenous. The debate on the latter is resurgent in the literature.  The results provide evidence that the ratio is, indeed, exogenous, and that the level of the real exchange rate influences economic growth as it determines such ratio. In other words, the real exchange rate is important for improving non-price competitiveness without, however, making the ratio between elasticities endogenous.

Thirlwall's law and the terms of trade: a parsimonious extension of the balance-of-payments-constrained growth model

2019 ◽  
Vol 7 (4) ◽  
pp. 463-485
Author(s):  
Esteban Pérez Caldentey ◽  
Juan Carlos Moreno-Brid
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Growth Model ◽  
Capital Flows ◽  
Export Performance ◽  
Terms Of Trade ◽  
Balance Of Payments ◽  
The Real ◽  
Elasticity Of Demand ◽  
Foreign Capital Inflows

This paper extends the balance-of-payments-constrained (BoPC) growth model and Thirlwall's law to include the terms of trade with and without capital flows. Without capital flows a positive (negative) change in the terms of trade by improving (worsening) export performance can ceteris paribus augment (reduce) the rate of growth of an economy compatible with balance of payments’ long-run equilibrium. With the inclusion of capital flows the BoPC dynamics become more complex. Assuming no changes in the real exchange rate and in the import elasticity of demand, an improvement in the terms of trade can increase the level of the external deficit compatible with BoPC growth. This results from the terms-of-trade effects on the purchasing of exports and on foreign-capital inflows. The positive effect of an improvement in the terms of trade may be partially offset by an appreciation of the real exchange rate and an increase in the import elasticity of demand, when the model is extended to allow for such interactions in the analysis.

Carry Trade, Exchange Rates, and the Balance-of-Payments

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Nelson H. Barbosa-Filho
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Foreign Debt ◽  
Balance Of Payments ◽  
Forward Rate ◽  
Spot Rate ◽  
Financial Constraint ◽  
Carry Trade ◽  
The Real

Abstract This paper presents a partial equilibrium model that integrates interest rate arbitrage with the balance-of-payments constraint to determine the real exchange rate. The sequential logic is the following: (i) carry-trade determines the term premium, with the spot rate showing greater volatility than the forward rate, (ii) uncovered interest rate parity determines the spot rate based on the real exchange rate consistent with a financial constraint, defined as a stable ratio of foreign reserves to foreign debt; and (iii) the trade balance consistent with the financial constraint determines the long-run real exchange rate for a given ratio of domestic to foreign income.

Summary and Appraisal

1989 ◽  
Vol 130 ◽  
pp. 3-6
Keyword(s):  
Economic Policy ◽  
Exchange Rate ◽  
North Sea ◽  
Output Growth ◽  
Balance Of Payments ◽  
Export Growth ◽  
Consumer Spending ◽  
Fixed Investment ◽  
Difficult Time ◽  
World Markets

The new Chancellor, John Major, has taken office at a difficult time for the conduct of economic policy. The boom of the late 1980s has spent its force, but as yet there is no sign of the improvement in the balance of payments, or the reduction in inflation one might expect as a consequence.In our main forecasts we show output growth in 1990 of just over 1½ per cent, less than 1 per cent excluding North Sea oil production. Consumer spending, which gave the main impetus to the early stages of the boom, will hardly rise next year and stock building is expected to turn negative. Fixed investment is unlikely to contribute much to the growth of demand year-on-year. The fall in the exchange rate during this year will help to sustain export growth next year, although world markets will not be as buoyant as they have been in 1989.

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