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Exchange Rate Misalignment, Capital Accumulation and Income Distribution Theory and Evidence from the Case of Brazil

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  • José Luis Oreiro
  • Eliane Araujo

Abstract

This article analyzes the relationship between economic growth, income distribution and real exchange rate within the neo-Kaleckian literature, through the construction of a nonlinear macrodynamic model for an open economy in which investment in fixed capital is assumed to be a quadratic function of the real exchange rate. The model demonstrates that the prevailing regime of accumulation in a given economy depends on the type of currency misalignment, so if the real exchange rate is overvalued, then the regime of accumulation will be profit-led, but if the exchange rate is undervalued, then the accumulation regime is wage-led. Subsequently, the adherence of the theoreti cal model to data is tested for Brazil in the period 1994/Q3-2008/Q4. The eco nometric results are consistent with the theoretical non-linear specification of the investment function used in the model, so that we can define the existence of a real exchange rate that maximizes the rate of capital accumulation for the Brazilian economy. From the estimate of this optimal rate we show that the real exchange rate is overvalued in 1994/Q3 2001/Q1 and 2005/Q4-2008/Q4 and undervalued in the period 2001/Q2-2005/Q3. As a direct corollary of this result, it follows that the prevailing regime of accumulation in the Brazilian economy after the last quarter of 2005 is profit-led. Key words: Open economy macroeconomics, Income distribution and real exchange rate.JEL: O4, E22, F31, D3.

Suggested Citation

  • José Luis Oreiro & Eliane Araujo, 2013. "Exchange Rate Misalignment, Capital Accumulation and Income Distribution Theory and Evidence from the Case of Brazil," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(3), pages 381-396.
    • Handle: RePEc:voj:journl:v:60:y:2013:i:3:p:381-396:id:357
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    Keywords

    Open economy macroeconomics; Income distribution and real exchange rate;

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D3 - Microeconomics - - Distribution

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