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Economic growth and income distribution with heterogeneous preferences on the real exchange rate

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  • Lima, Gilberto Tadeu
  • Porcile, Gabriel

Abstract

We present a dynamic model of capacity utilization and growth which takes into due account the joint determination of the international competitiveness (measured by the real exchange rate) and functional income distribution. It follows that how distribution, capacity utilization and growth vary with the real exchange rate depends on the cause of change in the latter (nominal exchange rate or markup). Over the medium run, the nominal exchange rate (markup) changes when the actual real exchange rate differs from the level preferred by the government (capitalists). While there is a medium-run equilibrium in which capitalists and the government come to share a preferred real exchange rate, the economy may not converge to it. In fact, when the government is primarily concerned with preserving workers’ share in income when manipulating the nominal exchange rate, a limit cycle obtains: the economy experiences endogenous cyclical fluctuations in the real exchange rate, distribution, capacity utilization and growth that resemble the experience of several developing countries. Thus, growth regressions featuring the real exchange rate should include distribution in the vector of control variables, which has not been the case.

Suggested Citation

  • Lima, Gilberto Tadeu & Porcile, Gabriel, 2011. "Economic growth and income distribution with heterogeneous preferences on the real exchange rate," MPRA Paper 32356, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:32356
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    References listed on IDEAS

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    1. Gabriel Porcile & Gilberto Tadeu Lima, 2010. "Real exchange rate and elasticity of labour supply in a balance-of-payments-constrained macrodynamics," Cambridge Journal of Economics, Oxford University Press, vol. 34(6), pages 1019-1039.
    2. Landon, Stuart & Smith, Constance E., 2006. "Exchange rates and investment good prices: A cross-industry comparison," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 237-256, March.
    3. Dani Rodrik, 2008. "The Real Exchange Rate and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 365-439.
    4. Carlos F. Diaz Alejandro, 1963. "A Note on the Impact of Devaluation and the Redistributive Effect," Journal of Political Economy, University of Chicago Press, vol. 71, pages 577-577.
    5. Mohsen Bahmani-Oskooee & Massomeh Hajilee, 2010. "On the relation between currency depreciation and domestic investment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 32(4), pages 645-660, July.
    6. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
    7. Robert A. Blecker, 2007. "The Economic Consequences of Dollar Appreciation for US Manufacturing Investment: A Time-Series Analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 21(4), pages 491-517.
    8. Dutt, Amitava Krishna, 1984. "Stagnation, Income Distribution and Monopoly Power," Cambridge Journal of Economics, Oxford University Press, vol. 8(1), pages 25-40, March.
    9. Blecker, Robert A, 1989. "International Competition, Income Distribution and Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 13(3), pages 395-412, September.
    10. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
    11. Arslan Razmi & Martin Rapetti & Peter Skott, 2009. "The Real Exchange Rate as an Instrument of Development Policy," UMASS Amherst Economics Working Papers 2009-07, University of Massachusetts Amherst, Department of Economics.
    12. Atkinson, Anthony B & Stiglitz, Joseph E, 1969. "A New View of Technological Change," Economic Journal, Royal Economic Society, vol. 79(315), pages 573-578, September.
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    Cited by:

    1. repec:bla:metroe:v:68:y:2017:i:4:p:792-815 is not listed on IDEAS
    2. Porcile, Gabriel & Sartorello Spinola, Danilo, 2018. "Natural, effective and BOP-constrained rates of growth: Adjustment mechanisms and closure equations," MERIT Working Papers 003, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    3. Cimoli, Mario & Lima, Gilberto Tadeu & Porcile, Gabriel, 2016. "The production structure, exchange rate preferences and the short-run—Medium-run macrodynamics," Structural Change and Economic Dynamics, Elsevier, vol. 37(C), pages 13-26.
    4. Antonio Soares Martins Neto & Gilberto Tadeu Lima, 2016. "Competitive Exchange Rate And Infrastructure In A Macrodynamic Of Economic Growth," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 082, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Rafael Saulo Marques Ribeiro & John S. L. McCombie, Gilberto Tadeu Lima, 2017. "Does Real Exchange Rate Undervaluation Really Promote Economic Growth?," Working Papers, Department of Economics 2017_11, University of São Paulo (FEA-USP).
    6. José Luis Oreiro & Fabricio Missio & Frederico G. Jayme Jr., 2015. "Capital Accumulation, Structural Change and Real Exchange Rate in a Keynesian-Structuralist Growth Model," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(2), pages 237-256, June.
    7. Antonio Soares Martins Neto & Gilberto Tadeu Lima, 2017. "Competitive Exchange Rate and Public Infrastructure in a Macrodynamic of Economic Growth," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 792-815, November.

    More about this item

    Keywords

    growth; distribution; capacity utilization; real exchange rate;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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