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Distributional Effects of Boom-Bust Cycles in Developing Countries with FinancialFrictions

  • Ahmet Faruk Aysan

This paper sheds light on the distributional implications of the exchange rate based stabilizations with financial imperfections when a country is populated by heterogeneous agents with respect to their source of income. This paper shows that boom-bust cycles in developing countries lead to income redistribution from tradable to nontradable sectors. Since the share of tradable sectors in aggregate GDP increases above its usual share with the devaluation of the currency, the individuals in tradable sectors pay more tax than what they receive as capital inflow in the expansion phase of the economy. The opposite holds for the individuals in nontradable sectors who gain more from the capital inflow as compared to what they lose from taxation

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File URL: http://www.econ.boun.edu.tr/public_html/RePEc/pdf/200610.pdf
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Paper provided by Bogazici University, Department of Economics in its series Working Papers with number 2006/10.

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Date of creation: Oct 2006
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Handle: RePEc:bou:wpaper:2006/10
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  1. Ricardo J. Caballero & Arvind Krishnamurthy, 1998. "Emerging Market Crises: An Asset Markets Perspective," NBER Working Papers 6843, National Bureau of Economic Research, Inc.
  2. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September.
  3. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November.
  4. Calvo, Guillermo A. & Drazen, Allan, 1998. "Uncertain Duration Of Reform," Macroeconomic Dynamics, Cambridge University Press, vol. 2(04), pages 443-455, December.
  5. Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, vol. 46(2), pages 357-378, April.
  6. Mendoza, Enrique G., 2000. "On the Benefits of Dollarization when Stabilization Policy Is Not Credible and Financial Markets are Imperfect," Working Papers 00-01, Duke University, Department of Economics.
  7. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 111-155.
  8. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  9. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
  10. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-23, March.
  11. Uribe, Martin, 1997. "Exchange-rate-based inflation stabilization: The initial real effects of credible plans," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 197-221, July.
  12. Guillermo A. Calvo & Allan Drazen, 1997. "Uncertain Duration of Reform: Dynamic Implications," NBER Working Papers 5925, National Bureau of Economic Research, Inc.
  13. Ahmet Faruk Aysan, 2006. "The Role of Distribution of the Income Shares of Individuals in Tradables and Nontradables on Exchange Rate Fluctuations and Delay of Stabilizations," Working Papers 2006/11, Bogazici University, Department of Economics.
  14. Dornbusch, Rudiger, 1982. "Stabilization policies in developing countries: What have we learned?," World Development, Elsevier, vol. 10(9), pages 701-708, September.
  15. repec:cup:macdyn:v:2:y:1998:i:4:p:443-55 is not listed on IDEAS
  16. Mendoza, Enrique G. & Uribe, Martin, 2000. "Devaluation risk and the business-cycle implications of exchange-rate management," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 239-296, December.
  17. Laura Alfaro, 2002. "On the Political Economy of Temporary Stabilization Programs," Economics and Politics, Wiley Blackwell, vol. 14(2), pages 133-161, 07.
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