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Net Foreign Assets, Productivity and Real Exchange Rates in Constrained Economies

Dimitris K. Christopoulos, Karine Gente () and Miguel Leon-Ledesma ()

Studies in Economics from Department of Economics, University of Kent

Abstract: Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an overlapping generations two-sector exogenous growth model in which RER determination may depend on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high demestic savings, the RER only depends on productivity spread between two sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, the RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, the RER is mainly driven by productivity and net foreign assets in constrained countries and by productivity in unconstrained countries.

Keywords: Real Exchange Rate; Capital Inflows Constraint; Overlapping Generations (search for similar items in EconPapers)
JEL-codes: E39 F32 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Date: 2010-12
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Related works:
Journal Article: Net foreign assets, productivity and real exchange rates in constrained economies (2012) Downloads
Working Paper: Net Foreign Assets, Productivity and Real Exchange Rates in Constrained Economies (2008) Downloads
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