Currency devaluations, distribution conflict and inflation in a post-Kaleckian open economy model

Juan Campana

No 240/2024, IPE Working Papers from Berlin School of Economics and Law, Institute for International Political Economy (IPE)

Abstract: The article develops a stylized medium-run post-Kaleckian open economy model with conflict inflation and combines two existing specifications of the income share targets of workers and firms. In the model, only the target of firms is directly affected by the real exchange rate. Workers do not set nominal wages in direct consideration of international relative prices. The target of workers is affected by the rate of capacity utilization, which reflects their wage bargaining position. We analyze the dynamic stability of the model, where a profit-led domestic demand regime or a weakly wage-led domestic regime with low nominal wage setting power of workers and a negative or sufficiently small direct impact of the real exchange rate on the trade balance are necessary conditions for stability. It is shown that the effects of a devaluation on aggregate demand, growth, trade balance, and inflation are generally ambiguous and highly contingent on the parameter constellation of the economy. The effectiveness of a currency devaluation as a stabilization policy remains unclear, its adoption is not without risk, and its negative social and distributional consequences may be large.

Keywords: currency devaluation; distribution conflict; inflation; open economy; Kaleckian model (search for similar items in EconPapers)
JEL-codes: E11 E12 E31 F31 F41 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-hme, nep-mon, nep-opm and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ipewps:301876

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