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

This paper sets out a formal model to account for the net effect of an exchange rate devaluation on both income elasticities of demand for export and imports and, consequently, on the long-term balance-of-payments constrained growth rate. Such model shows how the exchange rate impacts on the home country non-price competitiveness via changes in the variables which reflect the economic structure such as the income distribution and technological change. It is built upon two basic hypotheses. Firstly, it assumes technological improvements impact positively on the income elasticity of demand for exports and negatively on the income elasticity of demand for imports. Secondly, it assumes here that changes in income distribution have an ambiguous impact on the income elasticities ratio. The model shows that the net impact of a currency devaluation on growth is ambiguous and depends on several structural features.