Capital accumulation, structural change and real exchange rate in a Keynesian-Structuralist growth model

José Oreiro,Frederico Jayme,Fabricio Missio

doi:10.2298/pan1502237o

José Oreiro, Frederico Jayme + Show 1 more

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https://doi.org/10.2298/pan1502237o

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Abstract

The aim of this paper is to show at theoretical level that maintaining a competitive real exchange rate positively affects the economic growth of developing countries by means of a Keynesian-Structuralist model that combines elements of Kaleckian growth models with the balance of payments constrained growth models pioneered developed by Thirlwall. In this setting, the level of real exchange rate is capable, due to its effect over capital accumulation, to induce a structural change in the economy, making endogenous income elasticities of exports and imports. For reasonable parameter values it is shown that in steady-state growth there is two long-run equilibrium values for real exchange rate, one that corresponds to an under-valued currency and another that corresponds to an over-valued currency. If monetary authorities run exchange rate policy in order to target a competitive level for real exchange rate, than under-valued equilibrium is stable and the economy will show a high growth rate in the long-run.

Highlights

The objective of this article is to contribute to the theoretical analysis of the relationship between the level of real exchange rate and long-term growth in developing economies by means of a growth model that combines elements from both the Keynesian/Kaleckian and the Latin American Structuralist approaches
The main hypothesis that underlies the construction of our growth model is that maintaining a competitive real exchange rate induces investment and structural change in the economy, at the same time that allows relaxing the external constraint to long term growth given by balance of payments equilibrium condition
This implies that exchange rate policy is capable of influencing the longterm supply-side conditions, as it is capable of inducing a change in income elasticities of exports and imports

Summary

Real Exchange Rate and Economic Growth: A Review of the Literature

We have recently been seeing the growth of an important literature on the relationship between the real exchange rate and growth. According to Bresser-Pereira, Oreiro, and Marconi (2014, 2015) a devaluation of real exchange rate affects the productive heterogeneity of the economy as it reduces the relative real wages and the unit labour costs This will change the level of international specialization, increasing the number of goods that are manufactured in the country and, the share of manufacturing industry in GDP. It is assumed that the newer or more modern is the capital stock the greater will be the technological content of the goods produced and, the higher will be the income elasticity for the demand for exports and the lower will be the income elasticity of the demand for imports This means that a capital accumulation effort, with an impact on the productive structure via the modernisation of its manufacturing base, will increase the technological content of exports and, will raise the income elasticity of the demand for exports and the growth rate compatible with balance of payments equilibrium. A devaluation of real exchange rate, as it increases the productive heterogeneity and the technological content embodied in the goods, reduces the necessity of importing foreign goods, decreasing the income elasticity of the demand for imports

A Balance of Payments Constrained Growth Model with Endogenous Elasticities

A Keynesian-Structuralist Growth Model and Exchange Rate Policy

Final Remarks