Dualism, exchange rate, and employment: a structuralist model

Abstract

This paper describes an open economy framework for macroeconomic analysis of sectoral inter-linkage in the presence of dualism in interconnected markets. In particular, we will address different dimensions of dualism in the product market, the credit market and the labour market as well. The product market dualism is the coexistence of an agricultural sector and a demand-constrained industrial sector. The credit market dualism is characterized by existence of formal and informal credit. The dualistic labour market consists of skilled and unskilled workers. We will construct a structuralist model to examine the effects of different macroeconomic policies, namely interest rate policy, capital account liberalization, fiscal policy and administered price policy on employment, the wage gap between skilled and unskilled workers, and sectoral composition of output. The results in this paper critically depend on interactions among food price, industrial output, exchange rate, and interest rates of informal credit market, and wage rate of unskilled workers and multitude of cross effects generated by changes in these prices in response to policy induced shocks. This paper shows that capital account liberalization can generate a contractionary effect in a developing country, while the policy of lowering formal interest rate leads to expansion of both agricultural and industrial sectors which in turn causes employment generation in an emerging market economy.