Income distribution, Dutch disease and real exchange rate movements

Fernando Enrique Zarzosa Valdivia

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: A theoretical intra-temporal model for an economy with three sectors (exportable, importable and non-tradable), two production factors (labour and capital) and Cobb Douglas (linear) technologies in the tradable (non-tradable) sectors is used to relate real exchange rate movements to factor productivities, factor endowments, terms of trade and debt shocks. We also determine whether exogenous shocks generate the Dutch disease or not. Up to now, theoretical models like this one have not taken into account the influence of the income distribution on the magnitude of the Dutch disease and real exchange rate response to exogenous shocks. However, our model does it. Furthermore, exogenous shocks do also impact on factor retributions and production levels. As a result, these shocks lead to distributional income effects. In our model, the real exchange rate response to exogenous shocks depends not only on preferences and technology structures but also on the initial economic structures of the countries under analysis. Such economic structures are measured through income distribution ratios and the ratio debt / GDP. Exogenous shocks change such economic structures through their distributional income effects. As a result, the real exchange rate response to exogenous shocks may be variable and different between countries.

Keywords: Structural and PPP real exchange rate; Total and biased factor productivity; Factor endowments; Income distribution; Dutch disease; De-industrialization (search for similar items in EconPapers)
JEL-codes: C22 F11 F31 F35 F37 F41 F43 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-12
New Economics Papers: this item is included in nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:2006033

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