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Exchange Rate Misalignment, Capital Accumulation and Income Distribution Theory and Evidence from the Case of Brazil

  • José Luis Oreiro

    ()

    (Universidade de Brasília (UnB), National Scientific Council (CNPq), Brasil)

  • Eliane Araujo

    ()

    (Universidade Estadual de Maringá (UEM), Brasil)

This article analyzes the relationship between economic growth, income distribution and real exchange rate within the neo-Kaleckian literature, through the construction of a nonlinear macrodynamic model for an open economy in which investment in fixed capital is assumed to be a quadratic function of the real exchange rate. The model demonstrates that the prevailing regime of accumulation in a given economy depends on the type of currency misalignment, so if the real exchange rate is overvalued, then the regime of accumulation will be profit-led, but if the exchange rate is undervalued, then the accumulation regime is wage-led. Subsequently, the adherence of the theoretical model to data is tested for Brazil in the period 1994/Q3-2008/Q4. The econometric results are consistent with the theoretical non-linear specification of the investment function used in the model, so that we can define the existence of a real exchange rate that maximizes the rate of capital accumulation for the Brazilian economy. From the estimate of this optimal rate we show that the real exchange rate is overvalued in 1994/Q3- 2001/Q1 and 2005/Q4-2008/Q4 and undervalued in the period 2001/Q2-2005/Q3. As a direct corollary of this result, it follows that the prevailing regime of accumulation in the Brazilian economy after the last quarter of 2005 is profit-led.

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File URL: http://www.panoeconomicus.rs/casopis/2013_3/07%20Jose%20Luis%20Oreiro%20and%20Eliane%20Araujo.pdf
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Article provided by Savez ekonomista Vojvodine, Novi Sad, Serbia in its journal Panoeconomicus.

Volume (Year): 60 (2013)
Issue (Month): 3 (May)
Pages: 381-396

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Handle: RePEc:voj:journl:v:60:y:2013:i:3:p:381-396
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  1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  3. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," International Finance 9707001, EconWPA.
  4. Anthony Philip Thirlwall, 1979. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 32(128), pages 45-53.
  5. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," NBER Working Papers 6174, National Bureau of Economic Research, Inc.
  6. J.S.L. McCombie & Mark Roberts, 2002. "The Role of the Balance of Payments in Economic Growth," Chapters, in: The Economics of Demand-Led Growth, chapter 6 Edward Elgar.
  7. Bhaduri, Amit & Marglin, Stephen, 1990. "Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies," Cambridge Journal of Economics, Oxford University Press, vol. 14(4), pages 375-93, December.
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