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Income distribution, Dutch disease and real exchange rate movements

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  • ZARZOSA VALDIVIA, Fernando Enrique
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    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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    Bibliographic Info

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

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    Length: 27 pages
    Date of creation: Dec 2006
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    Handle: RePEc:ant:wpaper:2006033

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    Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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    Keywords: Structural and PPP real exchange rate; Total and biased factor productivity; Factor endowments; Income distribution; Dutch disease; De-industrialization;

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    1. Charles Engel & John H. Rogers, 1995. "How wide is the border?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 498, Board of Governors of the Federal Reserve System (U.S.).
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