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A song of ice and fire: Competitiveness in an export-led growing economy

Dávila-Fernández, Marwil and Oreiro, José (2021): A song of ice and fire: Competitiveness in an export-led growing economy.

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The role of the real exchange rate in explaining long-run processes of catching-up and falling-behind continues to be a question of central importance among alternative theories of growth and distribution. Existing empirical evidence suggests a positive association between exchange rates in levels and growth, especially in developing countries, though a currency depreciation has adverse effects. While these two elements have been separately incorporated into demand-led growth theories, a comprehensive assessment of the dynamic interaction between them is still missing. This article attempts to fill such a gap in the literature by developing an export-led growth model in which price and non-price competitiveness respond to the level and variation of the real exchange rate. In equilibrium, relative prices and the fundamentals of the productive structure are simultaneously determined. A more depreciated exchange rate and higher non-price competitiveness are associated with a higher rate of growth. It is shown that the interplay between a destabilising force from the goods market, and a stabilising mechanism from the labour market, might give rise to persistent and endogenous long-run cycles of structural change. Furthermore, the introduction of periodic Schumpeterian innovation waves generate irregular fluctuations similar to those observed in real data.

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