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Net Foreign Assets, Productivity and Real Exchange Rates in Constrained Economies

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  • Dimitris K. Christopoulos

    ()
    (Panteion University)

  • Karine Gente

    ()
    (University of Aix-Marseilles)

  • Miguel A. Leon-Ledesma

    ()
    (University of Kent)

Abstract

Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an exogenous 2-sector growth model in which RER determination depends on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the country converges to the world per capita income and RER only depends on productivity spread between sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, RER is mainly driven by productivity and net foreign assets in constrained countries and exclusively by productivity in unconstrained countries.

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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2008-17.

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Length: 34 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:swe:wpaper:2008-17

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Keywords: Real exchange rate; capital inflows constraint; overlapping generations;

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Citations

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Cited by:
  1. Doan, Thi Hong Thinh & Gente, Karine, 2014. "Real exchange rate and productivity in a specific-factor model with skilled and unskilled labour," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 1-15.
  2. Michael Bleaney & Mo Tian, . "Net Foreign Assets, Real Exchange Rates and Net Exports Revisited," Discussion Papers 13/04, University of Nottingham, CREDIT.
  3. repec:hal:wpaper:halshs-00574955 is not listed on IDEAS
  4. Mouhamadou Sy & Hamidreza Tabarraei, 2010. "Capital inflows and exchange rate in LDCs: The Dutch disease problem revisited," PSE Working Papers halshs-00574955, HAL.
  5. Michael Bleaney & Mo Tian, . "Exchange Rates and Trade Balance Adjustment:A Multi-Country Empirical Analysis," Discussion Papers 12/10, University of Nottingham, CREDIT.
  6. Max Groneck & Christoph Kaufmann, 2014. "Relative Sectoral Prices and Population Ageing: A Common Trend," Working Paper Series in Economics 69, University of Cologne, Department of Economics.

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