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

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

No 2008-17, Discussion Papers from School of Economics, The University of New South Wales

Abstract: Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an exogenous 2-sector growth model in which RER determination depends on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the country converges to the world per capita income and RER only depends on productivity spread between sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, 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, RER is mainly driven by productivity and net foreign assets in constrained countries and exclusively 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)
Pages: 34 pages
Date: 2008-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac and nep-opm
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Net foreign assets, productivity and real exchange rates in constrained economies (2012)
Working Paper: Net Foreign Assets, Productivity and Real Exchange Rates in Constrained Economies (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:swe:wpaper:2008-17

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