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Income distribution, Dutch disease and real exchange rate movements

  • ZARZOSA VALDIVIA, Fernando Enrique
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    A theoretical intra-temporal model for an economy with three sectors (exportable, importable and non-tradable), two production factors (labour and capital) and Cobb Douglas (linear) technologies in the tradable (non-tradable) sectors is used to relate real exchange rate movements to factor productivities, factor endowments, terms of trade and debt shocks. We also determine whether exogenous shocks generate the Dutch disease or not. Up to now, theoretical models like this one have not taken into account the influence of the income distribution on the magnitude of the Dutch disease and real exchange rate response to exogenous shocks. However, our model does it. Furthermore, exogenous shocks do also impact on factor retributions and production levels. As a result, these shocks lead to distributional income effects. In our model, the real exchange rate response to exogenous shocks depends not only on preferences and technology structures but also on the initial economic structures of the countries under analysis. Such economic structures are measured through income distribution ratios and the ratio debt / GDP. Exogenous shocks change such economic structures through their distributional income effects. As a result, the real exchange rate response to exogenous shocks may be variable and different between countries.

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    Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2006033.

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    Length: 27 pages
    Date of creation: Dec 2006
    Date of revision:
    Handle: RePEc:ant:wpaper:2006033
    Contact details of provider: Postal: Prinsstraat 13, B-2000 Antwerpen
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    1. Menzie D. Chinn, 2005. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," NBER Working Papers 11521, National Bureau of Economic Research, Inc.
    2. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July.
    3. Michael Devereux & Charles Engel, 2000. "The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production," Working Papers 0022, University of Washington, Department of Economics.
    4. Maurice Obstfeld, 2004. "External Adjustment," NBER Working Papers 10843, National Bureau of Economic Research, Inc.
    5. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers 4-95-16, Pennsylvania State - Department of Economics.
    6. Charles Engel, 2002. "The Responsiveness of Consumer Prices to Exchange Rates And the Implications for Exchange-Rate Policy: A Survey Of a Few Recent New Open-Economy..," NBER Working Papers 8725, National Bureau of Economic Research, Inc.
    7. Mwanza Nkusu, 2004. "Aid and the Dutch Disease in Low-Income Countries: Informed Diagnoses for Prudent Prognoses," IMF Working Papers 04/49, International Monetary Fund.
    8. Rudiger Dornbusch, 1985. "Purchasing Power Parity," NBER Working Papers 1591, National Bureau of Economic Research, Inc.
    9. Menzie Chinn & Louis Johnston, 1996. "Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries," NBER Working Papers 5709, National Bureau of Economic Research, Inc.
    10. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    11. Pablo GarcĂ­a, 1999. "Income Inequality and the Real Exchange Rate," Working Papers Central Bank of Chile 54, Central Bank of Chile.
    12. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
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