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Zarzosa Valdivia Fernando and Pentecost Eric

Zarzosa Valdivia Fernando and Pentecost Eric. An Exploration of the Interdependencies Between the Real Exchange Rate and the Size of the Tradable Sector in a Small Open Economy. Arnoldshain Seminar XI, University of Antwerp 2013.

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Zarzosa Valdivia Fernando and Pentecost Eric

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  1. Zarzosa Valdivia Fernando and Pentecost Eric An Exploration of the Interdependencies Between the Real Exchange Rate and the Size of the Tradable Sector in a Small Open Economy Arnoldshain Seminar XI, University of Antwerp 2013

  2. Introduction: An Australian Model focused on the structural real exchange rate (SRER=PT/PN) (and the economic structure?) Microfounded Model: Assumptions SRER and the Tradable goods share in GDP (Tshare): Inter-relationships and equilibrium relationships Effects of exogenous shocks on the SRER and Tshare Conclusions Content

  3. Introduction: An Australian model N • Salter-Swan Model: • Fundamentals: SRER-Ec. Structure • TFPX, TFPM, TFPN • K-L • TT • DS (debtss-transfers) NA A IA SRERA = PT/PN PPF 0 TA T

  4. Rational economic agents, CES Pref, Cobb-Douglas T, Linear N • Three goods: two tradable goods (Primary and Manufacturing) and one non-tradable goods • Two factors with a constant endowment: labour and capital • Perfect factor mobilitybetweensectors • Exogenous debt service (interest payments) and transfers to GDP, • Exogenous terms of trade • Perfectly competitive goods and factor markets Microfounded Model: Assumptions

  5. SRER and Tshares SRER Larger Tshare, creates an excess supply of T excess demand for N, SRER must diminish to switch expenditure from N-T and restore eq CA, Nmkt SRER0 E0 TshareC 0 Tshare0 Tshare

  6. SRER and Tshares SRER TshareP SRER0 E0 0 Tshare0 Tshare

  7. SRER and Tshares SRER TshareP SRER0 E0 TshareC 0 Tshare0 Tshare

  8. SRER and Tshares SRER TshareP SRER0 E0 TshareC 0 Tshare0 Tshare Neary and Purvis (82) Rodrik (2008) and van der Ploeg (2010,2011) Development Models

  9. SRER and the tshare responses to shocks Dutch Disease

  10. SRER, Tshare and TFPx θTd0 SRER TshareP E0 SRER0 TshareC θT0 0 Tshare(=θT) θTd0

  11. θTd0(X0) θTd01(X01) SRER, Tshare and TFPx SRER TshareP(TFPX0) θTP (TFPX1) E02 E0 E01 SRER0 TFPX1 >TFPX0 SRER1 E1 TshareC θT0 θT01 θT1 θT02 0 Tshare(=θT) EPE+ RME+ TE+ SE- θTd0is derived from

  12. SRER, Tshare and Factor Endowments (L) θTd0 SRER TshareP(L1) TshareP(L0) E1 SRER1 E02 SRER0 L1 >L0 E0 TshareC θT02 θT1 θT0 0 RME- SE+ TE- Tshare(=θT)

  13. TshareP(TT1) case (b) θTd0(TT0) SRER TshareP(TT0) SRER, Tshare and terms of trade (tt) TshareP(TT1)case (a) E02’ E01’ E01 E02 SRER01 E1’ SRER1’ E0 TT1 >TT0 SRER0 SRER1 E1 TshareC θT1’ θT02’ θT0 θT01’ θT1 θT02 θT01 0 Tshare(=θT) RME+ EPE+ PE+ Case (a) TE+ SE- RME- SE- Case (b) TE-

  14. SRER, Tshare and debt services-transfers (DS) SRER θTd0 TshareP SRER0 E02 SRER1 DS1 < DS0 E0 E1 TshareC(DS0) TshareC(DS1) θT02 θT0 0 θT1 Tshare(=θT) EME- SuE+ SE-=TE-

  15. Effects of exogenous shocks in an economy

  16. Theoretically: SRER, Tshares are simultaneous determined Role of Fundamentals: TFPs, L-K, TT, DS; ∆TT and ▼DS may give rise to the Dutch Disease Measuring resource allocation as the change in the Tshare, the EPE, PE, EME, RME, SuE, SE of exogenous shocks are identified and distinguished Conclusions

  17. Thank YouBedankt!

  18. An Australian model: TFPT N NA =NB B ND A D IB C NC IA SRERC PPF SRERA PPF’ SRERA 0 TA TB TD TC T

  19. An Australian model: EFFECTs N NA =NB B ND A D IA C NC IA SRERC PPF SRERA PPF’ SRERA EPE RME 0 TA TB TD TC T SE TE

  20. Structural real exchange rate (SRER) Universidad Nacional de Córdoba

  21. SRER and RERPPP exogenous

  22. A212 Argentina Today: L(SRER) SRER TshareP SRER(log(100-u)) TshareC(SRER) SRER0 E0GM E0GE SRER1 0 Tshare L0 log(100-u) Tshare0 L2 L1 1 2 Produced Required Unemploymentexpected Dollars requiredto correct the current account Real Depreciationrequired (▼PNor devaluation) or Productivity, Inv, ▼ gov.spendingthatfalls in non-tradables

  23. Argentina Today: L(SRER) SRER TshareP SRER(log(100-u)) TshareC(SRER) SRER0 E0GM E0GE US$:reserve Aggravate 0 Tshare L0 log(100-u) Tshare0 L2 L1 1 2 Produced Required Unemploymentexpected Dollars requiredto correct the current account Real Depreciationrequired (▼PNor devaluation) or Productivity, Inv, ▼ gov.spendingthatfalls in non-tradables

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