Real exchange rate and elasticity of labour supply in a balance-of-payments-constrained macrodynamics

• Published in: Cambridge journal of economics Vol. 34; no. 6; pp. 1019 - 1039
• Main Authors: Porcile, Gabriel, Lima, Gilberto Tadeu
• Format: Journal Article
• Language: English
• Published: Oxford Oxford University Press 01-11-2010; OXFORD UNIVERSITY PRESS; Oxford Publishing Limited (England)
• Subjects: Balance of payments; Capital goods; Capital investments; E12; E24; E25; Economic growth; Economic growth models; Economic growth rate; Economic models; Economic theory; Elasticity; Elasticity of labour supply; Exchange rates; Foreign exchange rates; Foreign investments; Growth models; Imports; Income distribution; International monetary economics; Labor economics; Labor supply; Labor supply elasticity; Labour supply; Macrodynamics; Macroeconomics; Real exchange rate; Real exchange rates; Real wages; Studies; Technological change
• ISSN: 0309-166X; 1464-3545
• DOI: 10.1093/cje/bep065

A macrodynamic model is proposed in which the real exchange rate and the elasticity of labour supply interact defining different trajectories of growth and income distribution in a developing economy. Growth depends on imports of capital goods which are paid with exports (there are no capital flows) and hence is constrained by equilibrium in current account. The role of the elasticity of labour supply is to prevent the real exchange rate from appreciating as the economy grows, thereby sustaining international competitiveness. The model allows for endogenous technological change and considers the impact of migration from the subsistence to the modern sector on the cumulative (Kaldor-Verdoorn) process of learning.