Distributional Effects of Boom-Bust Cycles in Developing Countries with Financial Frictions

Aysan, Ahmet Faruk (2006): Distributional Effects of Boom-Bust Cycles in Developing Countries with Financial Frictions.

Abstract

This paper sheds light on the distributional implications of the exchange rate based stabilizations with financial imperfections when a country is populated by heterogeneous agents with respect to their source of income. This paper shows that boom-bust cycles in developing countries lead to income redistribution from tradable to nontradable sectors. Since the share of tradable sectors in aggregate GDP increases above its usual share with the devaluation of the currency, the individuals in tradable sectors pay more tax than what they receive as capital inflow in the expansion phase of the economy. The opposite holds for the individuals in nontradable sectors who gain more from the capital inflow as compared to what they lose from taxation

• Item Type: MPRA Paper
• Institution: Bogazici University
• Language: English
• Keywords: Distributional Effects; Boom-Bust Cycles; Financial Frictions
• Subjects: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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