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Economic growth and income distribution with heterogeneous preferences on the real exchange rate

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  • Lima, Gilberto Tadeu
  • Porcile, Gabriel

Abstract

We present a dynamic model of capacity utilization and growth which takes into due account the joint determination of the international competitiveness (measured by the real exchange rate) and functional income distribution. It follows that how distribution, capacity utilization and growth vary with the real exchange rate depends on the cause of change in the latter (nominal exchange rate or markup). Over the medium run, the nominal exchange rate (markup) changes when the actual real exchange rate differs from the level preferred by the government (capitalists). While there is a medium-run equilibrium in which capitalists and the government come to share a preferred real exchange rate, the economy may not converge to it. In fact, when the government is primarily concerned with preserving workers’ share in income when manipulating the nominal exchange rate, a limit cycle obtains: the economy experiences endogenous cyclical fluctuations in the real exchange rate, distribution, capacity utilization and growth that resemble the experience of several developing countries. Thus, growth regressions featuring the real exchange rate should include distribution in the vector of control variables, which has not been the case.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32356.

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Date of creation: Jul 2011
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Handle: RePEc:pra:mprapa:32356

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Keywords: growth; distribution; capacity utilization; real exchange rate;

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  1. Dutt, Amitava Krishna, 1984. "Stagnation, Income Distribution and Monopoly Power," Cambridge Journal of Economics, Oxford University Press, vol. 8(1), pages 25-40, March.
  2. Robert A. Blecker, 2007. "The Economic Consequences of Dollar Appreciation for US Manufacturing Investment: A Time-Series Analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 21(4), pages 491-517.
  3. P. Krugman & L. Taylor, 1976. "Contractionary Effects of Devaluations," Working papers 191, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Arslan Razmi & Martin Rapetti & Peter Skott, 2009. "The Real Exchange Rate as an Instrument of Development Policy," UMASS Amherst Economics Working Papers 2009-07, University of Massachusetts Amherst, Department of Economics.
  5. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
  6. Landon, Stuart & Smith, Constance E., 2006. "Exchange rates and investment good prices: A cross-industry comparison," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 237-256, March.
  7. Carlos F. Diaz Alejandro, 1963. "A Note on the Impact of Devaluation and the Redistributive Effect," Journal of Political Economy, University of Chicago Press, vol. 71, pages 577.
  8. Gabriel Porcile & Gilberto Tadeu Lima, 2010. "Real exchange rate and elasticity of labour supply in a balance-of-payments-constrained macrodynamics," Cambridge Journal of Economics, Oxford University Press, vol. 34(6), pages 1019-1039.
  9. Atkinson, Anthony B & Stiglitz, Joseph E, 1969. "A New View of Technological Change," Economic Journal, Royal Economic Society, vol. 79(315), pages 573-78, September.
  10. Blecker, Robert A, 1989. "International Competition, Income Distribution and Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 13(3), pages 395-412, September.
  11. Dani Rodrik, 2008. "The Real Exchange Rate and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 365-439.
  12. Mohsen Bahmani-Oskooee & Massomeh Hajilee, 2010. "On the relation between currency depreciation and domestic investment," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 32(4), pages 645-660, July.
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Cited by:
  1. Mario Cimoli & Gilberto Tadeu Lima, Gabriel Porcile, 2013. "The Production Structure, Exchange Rate Preferences and the Short Run – Medium Run Macrodynamics," Working Papers, Department of Economics 2013_12, University of São Paulo (FEA-USP).

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