Structural heterogeneity, and endogeneity of elasticites on the balance-of-payments constrained growth model

Fabricio Missio and Frederico Jayme Jr

Textos para Discussão Cedeplar-UFMG from Cedeplar, Universidade Federal de Minas Gerais

Abstract: The aim of this paper is to demonstrate that, especially in developing countries, changes in the real exchange rate affect both the structure of production and the income elasticities of the demand for imports and exports – and, as a result, the balance-of-payments constraint to growth in the fashion of Thirlwall’s Law. If the latter is weakened, then these countries are able to reach a higher long-term growth rate. Thus, following Dosi, Pavitt e Soete (1990), we show how a devaluation of the real exchange rate affects an economy’s productive heterogeneity, by reducing its real wages. In addition, we demonstrate that the elasticities are endogenous, based on the argument that maintaining an undervalued exchange rate encourages research and innovation. This is due to its positive impact on self-financing conditions and on the access to credit, making it possible to modernise and diversify the structure of production. In the long-term, this implies an expansion of the export capacity and a reduction of the dependence on imports. Furthermore, based on Kaldor and Mirrlees (1962), we present a model that formalises the endogeneity of the elasticities by making them dependent on the average age of the capital stock of the economy. Lastly, we show how the approach suggested in this article is an improvement on the Structural Economic Dynamics (SED) approach, by demonstrating how variations in the real exchange rate alter the sectoral composition of the economy. In the final considerations, we present a series of arguments supporting the hypothesis that elasticities are endogenous to the real exchange rate.

Keywords: Balance-of-Payments Constraints; Real Exchange Rate; Structural Heterogeneity. (search for similar items in EconPapers)
JEL-codes: E10 O11 O31 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Chapter: Structural Heterogeneity and Endogeneity of Elasticities on the Balance of Payments Constrained Growth Model (2012)
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