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Income Distribution, Dutch Disease and Real Exchange Rate movements

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Author Info
Zarzosa Valdivia F.E.
Abstract

A theoretical intra-temporal model for an economy with three sectors (exportable, importable and non-tradable), two production factors (labour and capital) and Cobb Douglas (linear) technologies in the tradable (non-tradable) sectors is used to relate real exchange rate movements to factor productivities, factor endowments, terms of trade and debt shocks. We also determine whether exogenous shocks generate the Dutch disease or not. Up to now, theoretical models like this one have not taken into account the influence of the income distribution on the magnitude of the Dutch disease and real exchange rate response to exogenous shocks. However, our model does it. Furthermore, exogenous shocks do also impact on factor retributions and production levels. As a result, these shocks lead to distributional income effects. In our model, the real exchange rate response to exogenous shocks depends not only on preferences and technology structures but also on the initial economic structures of the countries under analysis. Such economic structures are measured through income distribution ratios and the ratio debt / GDP. Exogenous shocks change such economic structures through their distributional income effects. As a result, the real exchange rate response to exogenous shocks may be variable and different between countries.

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Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2006033.

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Length: 25 pages
Date of creation: Dec 2006
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Handle: RePEc:ant:wpaper:2006033

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  3. Maurice Obstfeld, 2004. "External Adjustment," NBER Working Papers 10843, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Pablo García, 1999. "Income Inequality and the Real Exchange Rate," Working Papers Central Bank of Chile 54, Central Bank of Chile. [Downloadable!]
  5. Michael Devereux & Charles Engel, 2000. "The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production," Working Papers 0022, University of Washington, Department of Economics. [Downloadable!]
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  6. Menzie D. Chinn, 2005. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," NBER Working Papers 11521, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Rudiger Dornbusch, 1985. "Purchasing Power Parity," NBER Working Papers 1591, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July. [Downloadable!] (restricted)
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  9. Menzie Chinn & Louis Johnston, 1996. "Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries," NBER Working Papers 5709, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March. [Downloadable!] (restricted)
  11. Mwanza Nkusu, 2004. "Aid and the Dutch Disease in Low-Income Countries: Informed Diagnoses for Prudent Prognoses," IMF Working Papers 04/49, International Monetary Fund. [Downloadable!]
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