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Currency Boards and Productivity Growth

Listed author(s):
  • Alfredo Canavese

    (Universidad Torcuato Di Tella- CONICET)

The paper studies the ways an economy working under a currency board could adjust when capital inflows stop suddenly. Six alternative solutions to restore the economic equilibrium are available when the sudden stop comes: a recession could push the prices of non-tradable goods down, a devaluation of the exchange rate could drive the prices of traded goods up, an increase in the international terms of trade could work in the same way the devaluation does, an increase in domestic savings could replace external savings, a recession could reduce the rate at which the economy creates new jobs or an increase in total factor productivity could validate the set of relative prices that ruled before the stop. The first three alternatives are short-run solutions (they require variables to adapt to new values of the parameters) while the rest could be addressed as structural solutions (they require parameters to change to keep variables at their original equilibrium levels). Solow`s neoclassical growth model (Solow,R. 1956) is used to analyze and evaluate each one of the six alternative solutions suggested. The model can easily accommodate supply side effects including total factor productivity growth which play a key rôle in this problem. The analysis of the changes in the values of parameters required for an 'structural adjustment' is made using elasticities to compare different steady-states. The results stress how important is for a safe currency board operation to encourage 'structural reforms' to favor total factor productivity improvements.

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Paper provided by EconWPA in its series Macroeconomics with number 0411012.

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Length: 11 pages
Date of creation: 16 Nov 2004
Handle: RePEc:wpa:wuwpma:0411012
Note: Type of Document - pdf; pages: 11
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  1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
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