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Net foreign assets, productivity and real exchange rates in constrained economies

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  • Christopoulos, Dimitris K.
  • Gente, Karine
  • León-Ledesma, Miguel A.

Abstract

Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an overlapping generations two-sector exogenous growth model in which RER determination may depend on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the RER only depends on the productivity spread between sectors (Balassa–Samuelson effect). If the constraint is too tight and/or domestic savings too low, the RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, the RER is mainly driven by productivity and net foreign assets in constrained countries and by productivity in unconstrained countries.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 3 ()
Pages: 295-316

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:295-316

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Web page: http://www.elsevier.com/locate/eer

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Keywords: Real exchange rate; Capital inflows constraint; Overlapping generations;

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Citations

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Cited by:
  1. Max Groneck & Christoph Kaufmann, 2014. "Relative Sectoral Prices and Population Ageing: A Common Trend," Working Paper Series in Economics 69, University of Cologne, Department of Economics.
  2. Doan, Thi Hong Thinh & Gente, Karine, 2014. "Real exchange rate and productivity in a specific-factor model with skilled and unskilled labour," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 1-15.
  3. repec:hal:wpaper:halshs-00574955 is not listed on IDEAS
  4. Michael Bleaney & Mo Tian, . "Net Foreign Assets, Real Exchange Rates and Net Exports Revisited," Discussion Papers 13/04, University of Nottingham, CREDIT.
  5. Michael Bleaney & Mo Tian, . "Exchange Rates and Trade Balance Adjustment:A Multi-Country Empirical Analysis," Discussion Papers 12/10, University of Nottingham, CREDIT.
  6. Mouhamadou Sy & Hamidreza Tabarraei, 2010. "Capital inflows and exchange rate in LDCs: The Dutch disease problem revisited," PSE Working Papers halshs-00574955, HAL.

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