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The Exchange Rate, Diversification, and Distribution in a Modified Ricardian Model with a Continuum of Goods

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  • Razmi, Arslan

    (Asian Development Bank Institute)

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    Abstract

    Several recent empirical and theoretical studies have revived interest in the relationship between the level of the exchange rate and economic development. This paper develops a dynamic model based on the Ricardian framework with a continuum of goods to consider the issue from a somewhat different perspective. While directly suppressing the real wage could also lead to diversification, what makes nominal devaluation a particularly useful tool is that it makes it possible to expand domestic profits while limiting internal distributional conflict and the ensuing negative effects on development.

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    File URL: http://www.adbi.org/files/2011.12.30.wp337.exchange.rate.diversification.ricardian.model.pdf
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    Bibliographic Info

    Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 337.

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    Length: 30 pages
    Date of creation: 03 Jan 2012
    Date of revision:
    Handle: RePEc:ris:adbiwp:0337

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    Keywords: economic development; exchange rate;

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    1. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
    2. Arvind Subramanian & Jonathan David Ostry & Simon Johnson, 2007. "The Prospects for Sustained Growth in Africa," IMF Working Papers 07/52, International Monetary Fund.
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    4. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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    8. 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.
    9. Razmi, Arslan & Rapetti, Martin & Skott, Peter, 2012. "The real exchange rate and economic development," Structural Change and Economic Dynamics, Elsevier, vol. 23(2), pages 151-169.
    10. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
    12. Imbs, Jean & Wacziarg, Romain, 2000. "Stages of Diversification," CEPR Discussion Papers 2642, C.E.P.R. Discussion Papers.
    13. Simon Johnson & Jonathan D Ostry & Arvind Subramanian, 2010. "Prospects for Sustained Growth in Africa: Benchmarking the Constraints," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 119-171, April.
    14. Hausmann, Ricardo & Rodrik, Dani, 2002. "Economic Development as Self Discovery," CEPR Discussion Papers 3356, C.E.P.R. Discussion Papers.
    15. Paulo Gala, 2008. "Real exchange rate levels and economic development: theoretical analysis and econometric evidence," Cambridge Journal of Economics, Oxford University Press, vol. 32(2), pages 273-288, March.
    16. Brenton, Paul & Newfarmer, Richard, 2007. "Watching more than the Discovery channel : export cycles and diversification in development," Policy Research Working Paper Series 4302, The World Bank.
    17. Freund, Caroline & Pierola, Martha Denisse, 2008. "Export surges : the oower of a competitive currency," Policy Research Working Paper Series 4750, The World Bank.
    18. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
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