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Endogenous elasticities and the impact of the real exchange rate on structural economic dynamics

Fabricio Missio, Ricardo Araujo () and Frederico Jayme Jr ()

Structural Change and Economic Dynamics, 2017, vol. 42, issue C, 67-75

Abstract: This paper aims at showing that the level of the real exchange rate affects the rate of economic growth. More specifically, we extend the model developed by Araujo and Lima (2007) to derive a balance-of-payments equilibrium growth rate analogous to Thirlwall’s Law based on a Pasinettian multi-sector macrodynamic framework in which income elasticities are endogenous to the level of the real exchange. Furthermore, the model is built to relate growth, the real exchange rate and sectoral heterogeneity. From a cumulative causation perspective, we thus demonstrate the effect of the level of real exchange rates on the generation of technological progress, and how these rates also impact the growth of the whole economy via a balance-of-payments constrained approach. Finally, we show that an undervalued real exchange rate has positive effects on economic growth in developing countries.

Keywords: Real exchange rate; Cumulative causation; Balance-of-payments constraint and economic growth (search for similar items in EconPapers)
JEL-codes: O14 O19 F12 (search for similar items in EconPapers)
Date: 2017
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