Exchange rate, output and employment: revisiting the contractionary devaluation hypothesis Saúl Keifman Universidad de Buenos Aires. I. Introduction. Purpose : discuss the relationship between the exchange rate and employment .
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Two opposite views:
(a) Heteredox economists support Kirchner’s competitive (undervalued) real exchange rate policy to sustain output and employment expansion, relying on sterilization and some capital controls.
(b) Orthodox economists propose a clean float and inflation targeting, which would lead to significant real appreciation.
(1) The contractionary devaluation hypothesis was very popular in the developing world.
(2) From a methodological viewpoint this paper presents macroeconomic models that take into account the structural characteristics of a specific country.
(a) Structural inflation theory
(b) Contractionary devaluation theory.
(1) The export good is the wage-good: food;
(2) Domestic food supply is inelastic but foreign food demand is perfectly elastic;
(3) The price elasticity of the domestic demand for food is less than one;
(4) Manufacturing production is oriented to the domestic market and its supply curve is very elastic;
(5) Imported goods are not substitutes for, but rather complementary to domestic production (nonproduced manufacturing inputs);
(6) Workers have a marginal propensity to spend on domestic goods greater than urban and rural property owners.
(a) Production of food, the exportable good is price sensitive (a stylized fact).
(b) We explicitly take into account the impact of trade liberalization (semi-closed economy versus open economy) and the presence of domestic production of importable manufactures.
Exchange rate/wage rate
(1) Employment will be lower in a more open economy (given the nominal exchange rate and wage rate).
(2) The exchange rate to wage ratio that maximizes employment will be higher in a more open economy.
(a) Strong real appreciation of the peso, which implied an important reduction of the exchange rate/wage ratio.
(b) fast, across the board, and deep trade liberalization.