Journal Article

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

Gabriel Porcile and Gilberto Tadeu Lima

in Cambridge Journal of Economics

Published on behalf of Cambridge Political Economy Society

Volume 34, issue 6, pages 1019-1039
Published in print November 2010 | ISSN: 0309-166X
Published online December 2009 | e-ISSN: 1464-3545 | DOI: https://dx.doi.org/10.1093/cje/bep065
Real exchange rate and elasticity of labour supply in a balance-of-payments-constrained macrodynamics

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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.

Keywords: Macrodynamics; Real exchange rate; Elasticity of labour supply; E12; E24; E25

Journal Article.  8898 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; General Aggregative Models

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