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Exchange Rate, Income Distribution and Technical Change in a Balance-of-Payments Constrained Growth Model

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  • Rafael Saulo Marques Ribeiro
  • John S. L. McCombie, Gilberto Tadeu Lima

Abstract

This paper sets out a formal model to account for the net effect of an exchange rate devaluation on both income elasticities of demand for export and imports and, consequently, on the long-term balance-of-payments constrained growth rate. Such model shows how the exchange rate impacts on the home country non-price competitiveness via changes in the variables which reflect the economic structure such as the income distribution and technological change. It is built upon two basic hypotheses. Firstly, it assumes technological improvements impact positively on the income elasticity of demand for exports and negatively on the income elasticity of demand for imports. Secondly, it assumes here that changes in income distribution have an ambiguous impact on the income elasticities ratio. The model shows that the net impact of a currency devaluation on growth is ambiguous and depends on several structural features.

Suggested Citation

  • Rafael Saulo Marques Ribeiro & John S. L. McCombie, Gilberto Tadeu Lima, 2015. "Exchange Rate, Income Distribution and Technical Change in a Balance-of-Payments Constrained Growth Model," Working Papers, Department of Economics 2015_01, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2015wpecon1
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    File URL: http://www.tandfonline.com/doi/full/10.1080/09538259.2016.1205819
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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, Cambridge Political Economy Society, vol. 34(6), pages 1019-1039.
    2. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," International Finance 9707001, University Library of Munich, Germany.
    3. Raphael Rocha Gouvea & Gilberto Tadeu Lima, 2010. "Structural change, balance-of-payments constraint, and economic growth: evidence from the multisectoral Thirlwall's law," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 33(1), pages 169-204, October.
    4. M. Rusydi & Sardar M. N. Islam, 2007. "Exchange Rate Economics in Developing Countries: Indonesian Exchange Rate Analysis," Palgrave Macmillan Books, in: Quantitative Exchange Rate Economics in Developing Countries, chapter 3, pages 34-44, Palgrave Macmillan.
    5. Raphael Rocha Gouvêa & Gilberto Tadeu Lima, 2013. "Balance‐of‐payments‐constrained growth in a multisectoral framework," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(2), pages 240-254, May.
    6. Gabriel Porcile & Marcus Dutra & Antonio Meirelles, 2007. "Technology gap, real wages, and learning in a balance-of-payments---constrained growth model," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(3), pages 473-500.
    7. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," NBER Working Papers 6174, National Bureau of Economic Research, Inc.
    8. Jonathan Perraton, 2003. "Balance of Payments Constrained Growth and Developing Countries: An examination of Thirlwall's hypothesis," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(1), pages 1-22.
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    Cited by:

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    2. Cícero, Vinicius Curti & Lima, Gilberto Tadeu, 2023. "Functional distribution of income as a determinant of importing behavior: An empirical analysis," Structural Change and Economic Dynamics, Elsevier, vol. 65(C), pages 393-405.
    3. Aistleitner, Matthias & Gräbner, Claudius & Hornykewycz, Anna, 2021. "Theory and empirics of capability accumulation: Implications for macroeconomic modeling," Research Policy, Elsevier, vol. 50(6).
    4. Dávila-Fernández, Marwil J. & Sordi, Serena, 2020. "Structural change in a growing open economy: Attitudes and institutions in Latin America and Asia," Economic Modelling, Elsevier, vol. 91(C), pages 358-385.
    5. Dávila-Fernández, Marwil J. & Oreiro, José L. & Dávila Dávila, Mario W., 2018. "Endogenizing non-price competitiveness in a BoPC growth model with capital accumulation," Structural Change and Economic Dynamics, Elsevier, vol. 44(C), pages 77-87.
    6. Ribeiro, Rafael S.M. & McCombie, John S.L. & Lima, Gilberto Tadeu, 2020. "Does real exchange rate undervaluation really promote economic growth?," Structural Change and Economic Dynamics, Elsevier, vol. 52(C), pages 408-417.
    7. Tamer Rawashdeh & Mahmoud Al-Rdaydeh & Basem Hamouri, 2020. "The Effect of International Currency Crises on the Balance of Payments: Evidence From Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(5), pages 275-284, October.
    8. Adalmir Marquetti & Luiz Eduardo Ourique & Henrique Morrone, 2020. "A Classical-Marxian Growth Model of Catching Up and the Cases of China, Japan, and India: 1980–2014," Review of Radical Political Economics, Union for Radical Political Economics, vol. 52(2), pages 312-334, June.
    9. Dávila-Fernández, Marwil & Oreiro, José, 2021. "A song of ice and fire: Competitiveness in an export-led growing economy," MPRA Paper 109821, University Library of Munich, Germany.
    10. Marwil J. Dávila-Fernández & Serena Sordi, 2021. "Thirlwall's law: Binding-constraint or centre-of-gravity? A possible Kaleckian solution," Department of Economics University of Siena 853, Department of Economics, University of Siena.
    11. Porcile, Gabriel & Sartorello Spinola, Danilo & Yajima, Giuliano, 2020. "Patterns of growth in structuralist models: The role of the real exchange rate and industrial policy," MERIT Working Papers 2020-027, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    12. Frenkel, Roberto & Rapetti, Martin, 2014. "The real exchange rate as a target of macroeconomic policy," MPRA Paper 59335, University Library of Munich, Germany.
    13. Robert A. Blecker, 2022. "New advances and controversies in the framework of balance‐of‐payments‐constrained growth," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 429-467, April.
    14. Marwil J. Dávila-Fernández & Serena Sordi, 2019. "From open economies to attitudes towards change. Growth and institutions in Latin America and Asia," Department of Economics University of Siena 809, Department of Economics, University of Siena.
    15. Porcile, Gabriel & Spinola, Danilo & Yajima, Giuliano, 2021. "Patterns of Growth in Structuralist Models: The Role of PoliticalEconomy," CAFE Working Papers 12, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.
    16. Esteban Javier Leguizamón & Pablo Alfredo Gluzmann, 2019. "Tipo de cambio real y crecimiento económico: Un análisis de robustez," Asociación Argentina de Economía Política: Working Papers 4162, Asociación Argentina de Economía Política.
    17. Antonio Soares Martins Neto, 2017. "Income distribution and external constraint: Brazil in the commodities boom [Income distribution and external constraint: Brazil in the commodities boom]," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 27(1), pages 7-34, January-A.

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    More about this item

    Keywords

    Exchange rate; income distribution; technical change; balance-of-payments constrained growth.;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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