Exchange rate misalignment, capital accumulation and income distribution: Theory and evidence from the case of Brazil

Abstract

This article analyzes the relationship between economic growth, income distribution and real exchange rate within the neo-Kaleckian literature, through the construction of a nonlinear macrodynamic model for an open economy in which investment in fixed capital is assumed to be a quadratic function of the real exchange rate. The model demonstrates that the prevailing regime of accumulation in a given economy depends on the type of currency misalignment, so if the real exchange rate is overvalued, then the regime of accumulation will be profit-led, but if the exchange rate is undervalued, then the accumulation regime is wage-led. Subsequently, the adherence of the theoretical model to data is tested for Brazil in the period 1994/Q3-2008/Q4. The econometric results are consistent with the theoretical non-linear specification of the investment function used in the model, so that we can define the existence of a real exchange rate that maximizes the rate of capital accumulation for the Brazilian economy. From the estimate of this optimal rate we show that the real exchange rate is overvalued in 1994/Q3- 2001/Q1 and 2005/Q4-2008/Q4 and undervalued in the period 2001/Q2-2005/Q3. As a direct corollary of this result, it follows that the prevailing regime of accumulation in the Brazilian economy after the last quarter of 2005 is profit-led

An empirical test of the Post-Keynesian growth model applied to functional income distribution and the growth regime in Brazil

“…Following the Bhaduri-Marglin framework, we estimated a VAR model to investigate whether, between 1970 and 2008, the Brazilian economy was profit-led or wage-led. From this perspective, we followed certain empirical works which used the PKGM to provide certain insights about the Brazilian growth experience [Araújo and Gala (2012), Oreiro and Araujo (2013), Marrone (2015) and Feijó, Lamonica, and Bastos (2015) and (Feijó, Câmara, and Cerqueira 2015)]. The standard VAR model specification provided some evidence to conclude that both the growth regime and the demand regime of the Brazilian economy were profit-led during this period, insofar as a positive profit share shock affected both economic growth and capacity utilization rate in the same direction.…”

“…However, recently, a few papers have employed econometric methodologies to test the growth regime in Brazil, starting with a Post-Keynesian structure (Araújo and Gala 2012;Feijó, Câmara, and Cerqueira 2015;Feijó, Lamonica, and Bastos 2015;Marrone 2015;Oreiro and Araujo 2013). Table 1 summarizes this literature and demonstrates that the global results provided by the authors are not unambiguous: simply by examining these works, it is difficult to define the Brazilian economy as either profit-led or wage-led.…”

“…Furthermore, although this is now a pioneer work in testing the PKGM for the Brazilian economy, Araujo and Gala did not perform any unit root or diagnostic tests, and the sample coverage is narrow, which means that the results reported by the authors cannot be robust. Oreiro and Araujo (2013) utilized quarterly data from 1994.Q3 to 2008.Q4 in order to analyze the relationship between economic growth, income distribution and real exchange rate in a nonlinear macrodynamic model. In the theoretical model, they assumed that the accumulation rate depended not only on the rate of capacity utilization and profit share, but also on the exchange rate and the square of the exchange rate.…”

“…Based on these assumptions, it was possible to estimate the real exchange rate that maximizes the accumulation rate (called the optimal exchange rate). After performing unit root and cointegration tests and using ordinary last square methodology, Oreiro and Araujo (2013) estimated equations for profit share and capacity utilization. The authors concluded that the optimal exchange rate over the period was 2.03.…”

Desalinhamento cambial, regimes de acumulação e metas de inflação em um modelo pós-keynesiano de crescimento

“…A relação entre desalinhamento cambial e regimes de acumulação foi analisada pioneiramente por Oreiro e Araujo (2013). Esses autores desenvolvem um modelo neokaleckiano de crescimento e distribuição, com base no modelo original de Bhaduri e Marglin, no qual a taxa desejada de acumulação de capital é uma função quadrática da taxa real de câmbio.…”