The Exchange Rate, Diversification, and Distribution in a Modified Ricardian Model with a Continuum of Goods
Razmi, Arslan | December 2011
Abstract
Several recent empirical and theoretical studies have revived interest in the relationship between the level of the exchange rate and economic development. This paper develops a dynamic model based on the Ricardian framework with a continuum of goods to consider the issue from a somewhat different perspective. In the short run, a devaluation can boost profits despite real wage rigidity. Moreover, the resulting diversification can offset the negative consequences for the trade balance of higher employment and profitability at home. Over the longer run, and in the presence of learning by accumulation, the initial boost to profits and investment induced by a devaluation could enable a country to gain a permanent foothold in new sectors at a higher real wage. While directly suppressing the real wage could also lead to diversification, what makes nominal devaluation a particularly useful tool is that it makes it possible to expand domestic profits while limiting internal distributional conflict and the ensuing negative effects on development.
Citation
Razmi, Arslan. 2011. The Exchange Rate, Diversification, and Distribution in a Modified Ricardian Model with a Continuum of Goods. © Asian Development Bank. http://hdl.handle.net/11540/3930. License: CC BY 3.0 IGO.Keywords
Development
Finance
Development Challenges
Development Issues
Development Problems
Microenterprises Finance
Commercial Finance Companies
Enterprise Financing
Financial Analysis
Banking Finance And Investment
ADB
Project finance
Development plans
Strategic planning
Business Financing
Investment Requirements
Insurance Companies
International Monetary Relations
International Financial Market
Exchange Rate
Insurers
Insurance stocks
Insurance holding companies
Insurance carriers
Insurance agencies
Business subsidies
Investment companies
International banks and banking
Stock exchanges
Grants
Loans
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