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A General Equilibrium Analysis Of Foreign Exchange Shortages In A Developing Economy

In: Modeling Developing Countries' Policies in General Equilibrium

Author

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  • Kemal Dervis
  • Jaime de Melo
  • Sherman Robinson

Abstract

An acute shortage of foreign exchange has been a recurring problem for many developing economies. In the development planning literature, the problem is usually discussed within the framework of the ‘two-gap’ or ‘multi-gap’ models developed and elaborated during the sixties. These models assume fixed input–output coefficients and limited possibilities for export expansion. As a result, a foreign exchange shortage becomes an almost absolute constraint on growth in that even if domestic savings were available in sufficient amounts to allow an increase in investment, the absence of the required complementary foreign exchange makes such an increase impossible. The neoclassical answer to this ‘structuralist’ view has always been to stress the role of relative prices and, in particular, exchange rate adjustment as a means of overcoming any foreign exchange shortage. Stated simply, this view treats the alleged foreign exchange gap as only reflecting an overvalued real exchange rate. If the exchange rate is allowed to clear the foreign exchange market, there can be no foreign exchange gap…

Suggested Citation

  • Kemal Dervis & Jaime de Melo & Sherman Robinson, 2015. "A General Equilibrium Analysis Of Foreign Exchange Shortages In A Developing Economy," World Scientific Book Chapters, in: Modeling Developing Countries' Policies in General Equilibrium, chapter 4, pages 71-86, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789814494816_0004
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    Keywords

    Applied General Equilibrium Models; Trade Policy; Computable General Equilibrium; Archetypes;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F00 - International Economics - - General - - - General
    • F01 - International Economics - - General - - - Global Outlook
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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