Exchange Rate, Income Distribution and Technical Change in a Balance-of-Payments Constrained Growth Model

Abstract

This paper develops a formal model that accounts for the net effect of an exchange rate devaluation on the long-term balance-of-payments constrained growth rate. Such a model investigates how a currency devaluation impacts on the home country non-price competitiveness via changes in income distribution and the rate of technological innovation. The model is built upon two plausible hypotheses. First, it is assumed that the rate of technological innovation is directly related to the income elasticity of demand for exports and inversely related to the income elasticity of demand for imports. Second, it is assumed that a redistribution of income between labour and capital has an ambiguous direct impact on the income elasticities ratio. The model shows that the net impact of a currency devaluation on growth can go either way depending on the institutional framework of the economy.

Income distribution and external constraint: Brazil in the commodities boom

“…This section presents a BOP-constrained model, based on Ribeiro et al (2016), which illuminates the forces behind the Brazilian path as discussed above. Trade income elasticities are determined by technological gap and income distribution.…”

“…The tale is quite simple: up to a certain critical point, higher real wages enhance the ability of workers to learn, imitate and improve foreign technology, with positive effects on non-price competitiveness. Ribeiro et al (2016) discuss several channels through which an exchange rate policy may affect non-price competitiveness. Among them, the paper discusses how changes in the real exchange rate affect income distribution and how the latter infl uences consumption patterns and fi rms' decisions.…”

“…First, in Porcile et al (2007), there is no discussion of the impact of income distribution on consumption patterns and, then, on the income elasticity of imports. Second, in Ribeiro et al (2016), even though the authors provide an extensive discussion on the effects in both income elasticities (and affi rm that "the net impact of changes in the wage share on each income elasticity can go either way…" (Ribeiro et al, 2016, p.12)), the ultimate assumption of a positive impact of income distribution on the trade elasticities ratio may not hold for the Brazilian economy (Souto, 2015). Therefore, this paper aims to contribute to the literature on income distribution, discussing its interactions with non-price competitiveness and growth.…”

“…Therefore, this paper aims to contribute to the literature on income distribution, discussing its interactions with non-price competitiveness and growth. This paper discusses, in a BOP-dominated macrodynamic model based on Ribeiro et al (2016), the impact of Brazilian distributive policies on the BOP-constrained rate of growth. Moreover, this paper includes a government sector as in Cimoli et al (2015), which tax profi ts and spends in distributive programs and productive investment.…”

“…Not only this path is unsustainable in the medium run, but may also have harmed the long-run growth consistent with BOP equilibrium. This paper discusses, in a BOP-dominated macrodynamic model based on Ribeiro et al (2016), the impact of Brazilian distributive policies in the BOPconstrained rate of growth. It is suggested that distributive programs can harm longterm growth due to rising income elasticity of imports and higher technological gap.…”