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A Model of Transfer Problem with Application to LDCs

Author

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  • Mouhamadou Sy

    (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, Département Economie - Finances - Centre d'analyse stratégique)

  • Hamidreza Tabarraei

    (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

Abstract

This paper studies a form of Dutch disease known as the Transfer problem in developing countries. On the theoretical side, we propose a model which unifies the channel proposed by Keynes (1929), Balassa (1964) and Samuelson (1964), and Yano and Nugent (1999). The real exchange rate dynamic is decomposed in three components: the productivity differential, the terms-of-trade, and international transfer. The effects of international transfer on the real exchange rate depend mainly on the propensity of governments to subsidize the tradable or the nontradable sectors. In the empirical section we take into account the heterogeneity of the sample, the dynamic of the real exchange rate and the non stationary nature of the data. Furthermore, we demonstrate empirically that the channels identified by Balassa, Samuelson and Keynes are the main driving forces of real exchange rate movements in developing countries. The Balassa-Samuelson effect by itself accounts for 57% of RER variations while capital inflows account only for 19% of RER variations. The Transfer problem through capital inflows is not rejected but its impact on RER movements in the LDCs is weak.

Suggested Citation

  • Mouhamadou Sy & Hamidreza Tabarraei, 2012. "A Model of Transfer Problem with Application to LDCs," PSE Working Papers halshs-00689490, HAL.
  • Handle: RePEc:hal:psewpa:halshs-00689490
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00689490
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    Keywords

    F31; F35; F41; Dutch Disease; Transfer Problem; Capital Inflows; Real Exchange Rate;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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