Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/101247
Authors: 
Razmi, Arslan
Year of Publication: 
2011
Series/Report no.: 
ADBI Working Paper Series 337
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.
Subjects: 
economic development
exchange rate
JEL: 
O40
F12
F16
O24
Document Type: 
Working Paper

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