Some Unpleasant Currency Devaluation Arithmetic in a Post-Keynesian Macromodel

Rafael Ribeiro () and Gilberto Tadeu Lima John S. L. McCombie
Authors registered in the RePEc Author Service: John Stuart Landreth McCombie and Gilberto Tadeu Lima

No 2016_03, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: Conventional view argues that devaluation increases the price competitiveness of domestic goods, thus allowing the economy to achieve a higher level of economic activity. However, these theoretical treatments largely neglect two important effects following devaluation: (i) the inflationary impact on the price of imported intermediate inputs which raises the prime costs of firms and deteriorates partially or totally their price competitiveness; and (ii) the redistribution of income from wages to profits which affects ambiguously the aggregate demand as workers and capitalists have different propensities to save. New structuralist economists have explored these stylised facts neglected by the orthodox literature and, by and large, conclude that devaluation has contractionary effects on growth and positive effects on the external balance. Given that empirical evidence on the correlation between devaluation and growth is quite mixed, we develop a more general Keynesian-Kaleckian model that takes into account both opposing views in order to analyse the net impact of currency depreciation on the short-run growth rate and the current account. We demonstrate that this impact can go either way, depending on several conditions such as the type of growth regime, that is, wage-led or profit-led, and the degree of international price competitiveness of domestic goods.

Keywords: Currency devaluation; price competitiveness; wage-led and profit-led growth. (search for similar items in EconPapers)
JEL-codes: E25 O33 O40 (search for similar items in EconPapers)
Date: 2016-03-02, Revised 2017-06-01
New Economics Papers: this item is included in nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Journal Article: Some unpleasant currency-devaluation arithmetic in a post Keynesian macromodel (2017)
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