Foreign Transfers and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy

Cerra, Valerie; Tekin, Serpil; Turnovsky, Stephen J.

doi:10.1007/s11079-009-9108-x

Cited by 20 publications

(16 citation statements)

References 31 publications

(50 reference statements)

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“…Due to the homogeneity of the utility function with respect to traded and nontraded consumption, the macroeconomic equilibrium attained is independent of any distributional aspects. This system is virtually identical to (12) and (13) studied by Cerra et al (2009), where the behavior of the aggregate dynamics in response to an increase in international transfers and its allocation is discussed in detail. For convenience, the linearized dynamic equilibrium is set out in the Appendix.…”

Section: Macroeconomic Equilibriummentioning

confidence: 81%

“…where i μ is agent i's shadow value of wealth associated with i N . These conditions are standard and have been discussed elsewhere; see Cerra et al (2009). The key point to observe here is that since ρ and ( ) i ⋅ are common to all individuals, (6c) implies that all agents choose the same growth rate for their respective shadow values of wealth, independent of their relative levels of wealth.…”

Section: Technology and Factor Paymentsmentioning

confidence: 95%

“…This ensures that we are dealing 20 The choice of parameters, particularly those relating to the sectoral aspects, are discussed in greater detail by Morshed and Turnovsky (2004) and Cerra et al (2009). Our choice of government expenditure elasticities in production, 1 2 0.15, ν ν = = implies that government expenditure is equally productive in either sector, which seems like a natural benchmark, and implies that both production functions are subject to 15% increasing returns to scale.…”

Section: Numerical Simulationsmentioning

confidence: 99%

“…3 To the extent that the transfer is invested in enhancing productive capacity, thereby directly altering relative sectoral productivities, it will further influence relative prices, and therefore resource allocation. 4 A recent paper by Cerra, Tekin, and Turnovsky (2009) conducts comprehensive numerical simulations to address both the quantitative and qualitative consequences of these allocational aspects. They assume that the transfer can be devoted to three potential uses.…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

The distributional consequences of foreign transfers: do they reduce or exacerbate inequality?

Bouza¹,

Turnovsky²

2011

Oxford Economic Papers

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This paper studies the impact of foreign transfers on the recipient country''s aggregate economic performance, as well as its distribution of wealth and income, within a dynamic two-sector dependent economy framework. The transfers may take the form of a pure flow of resources, devoted to debt reduction, or alternatively they may be allocated to the productivity enhancement of the traded or nontraded sector, via investment in the sector's infrastructure. The effect of the transfer on aggregate economic performance depends crucially upon: (i) the relative capital intensities of the two productive sectors, and (ii) the allocation of the transfers across the sectors. The consequences for wealth and income inequality depend not only upon these two factors, but also upon (iii) the economy's access to the world financial market. Most of the analysis is conducted using numerical simulations, where we characterize the dynamic evolution of both the aggregate economy and wealth/income inequality. Whether growth and inequality are positively or negatively associated over time depends upon the three factors noted above. In this regard, the analysis can be reconciled with the contrasting range of empirical evidence.

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Section: Macroeconomic Equilibriummentioning

confidence: 81%

Section: Technology and Factor Paymentsmentioning

confidence: 95%

Section: Numerical Simulationsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

The distributional consequences of foreign transfers: do they reduce or exacerbate inequality?

Bouza¹,

Turnovsky²

2011

Oxford Economic Papers

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“…(b) The instantaneous, transitional (the length and depth of the U-shaped adjustment), and steady-state (long-run) response of the real exchange rate to an increase in public investment depends critically on (i) the sectoral composition of government spending on infrastructure (i.e., whether the spending increase impinges on traded or non-traded output), 7 A recent contribution by Cerra et al(2010) also examines the e¤ects of …nancing public investment by foreign aid. However, they model the ‡ow of public investment as being relevant for production rather than the accumulated stock of public capital, along with a costless transfer of capital across sectors.…”

Section: Introductionmentioning

confidence: 99%

Fiscal Policy and the Real Exchange Rate

Chatterjee¹,

Mursagulov²

2016

Macroecon. Dynam.

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This paper examines the mechanisms through which government spending affects the dynamics of the real exchange rate. Using a two-sector dependent open economy model with intersectoral mobility costs for private capital, we show that public investment generates (i) a nonmonotonic U-shaped adjustment path for the real exchange rate with sharp intertemporal trade-offs and (ii) a crowding-in of private consumption, consistent with stylized facts. The effects of public consumption, however, are in sharp contrast to those of public investment. The effect of government spending on the real exchange rate depends critically on (i) the sectoral composition of public spending, (ii) the underlying financing policy, (iii) the sectoral intensity of private capital in production, (iv) the relative sectoral productivity of public infrastructure, (v) the elasticity of substitution in production, and (vi) intersectoral mobility costs for capital. In deriving these results, we identify conditions under which the predictions of the neoclassical open economy model can be reconciled with empirical regularities. Our results underscore the importance of decoupling the effects of government investment from those of government consumption in understanding the relationship between fiscal policy and the real exchange rate.

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Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy

Cardi¹,

Restout²

2013

Open Econ Rev

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We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate the effects of unanticipated and anticipated tax reforms. First, an unanticipated tax reform produces an expansion of GDP, labor, and investment, while an anticipated tax reform has opposite effects before the implementation of the labor tax cut. Quantitatively, if the traded sector is more capital intensive, GDP increases by 1.6 percentage points or declines by 2.7 percentage points after three years, depending on whether the tax cut is unanticipated or anticipated. Second, we find that GDP change masks a wide dispersion in sectoral output responses. As long as investment is both traded and non traded, a tax reform substantially raises the relative size of the non-traded sector after three years while traded output always drops. Third, a tax reform improves welfare in all scenarios, more so if the markup is endogenous, but less so if the shock is anticipated. Importantly, we find that welfare gains in a twosector economy with capital accumulation and perfect access to external borrowing are between 39% and 89% higher than those in an economy without physical capital.

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Foreign Transfers and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy

Abstract: Foreign transfers, Real exchange rates, Capital accumulation, F34, F35, F41, F43,

Cited by 20 publications

References 31 publications

The distributional consequences of foreign transfers: do they reduce or exacerbate inequality?

The distributional consequences of foreign transfers: do they reduce or exacerbate inequality?

Fiscal Policy and the Real Exchange Rate

Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy

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