Net Foreign Assets, Productivity and Real Exchange Rates in Constrained Economies

36 Pages Posted: 5 Jan 2009

See all articles by Karine Gente

Karine Gente

University of Mediteranee - CEDERS

Dimitris Christopoulos

Panteion University of Athens - Department of Economic and Regional Development

Miguel A. Leon-Ledesma

University of Kent - Department of Economics

Date Written: September 1, 2008

Abstract

Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an exogenous 2-sector growth model in which RER determination depends on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the country converges to the world per capita income and RER only depends on productivity spread between sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, RER is mainly driven by productivity and net foreign assets in constrained countries and exclusively by productivity in unconstrained countries.

Keywords: Real exchange rate, capital inflows constraint, overlapping generations

JEL Classification: E39, F32, F41

Suggested Citation

Gente, Karine and Christopoulos, Dimitris and Leon-Ledesma, Miguel, Net Foreign Assets, Productivity and Real Exchange Rates in Constrained Economies (September 1, 2008). UNSW Australian School of Business Research Paper No. 2008 ECON 17, Available at SSRN: https://ssrn.com/abstract=1323265 or http://dx.doi.org/10.2139/ssrn.1323265

Karine Gente (Contact Author)

University of Mediteranee - CEDERS ( email )

14 av Jules Ferry
Aix en Provence cedex, 13621
France

Dimitris Christopoulos

Panteion University of Athens - Department of Economic and Regional Development ( email )

136, Sygrou Avenue
176 71 Athens
Greece

Miguel Leon-Ledesma

University of Kent - Department of Economics ( email )

Keynes College
Kent, CT2 7NP
United Kingdom
00 44 0 1227 823026 (Phone)
00 44 0 1227 827850 (Fax)

HOME PAGE: http://www.ukc.ac.uk/economics/mal/

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