Real exchange rate and structural change in a Kaldorian balance of payments constrained growth model

Abstract

The objective of the present article is to develop a Kaldorian Growth model that (i) had a balance of payments constraint, in order to eliminate the inconsistency of balance of payments growth models; and (ii) defines a precise mechanism by which the level of real exchange rate can affect long-term growth. An important innovation introduced in the model is the idea that Kaldor-Verdoorn coefficient - that measures the sensibility of growth rate of labor productivity to output growth - depends on the share of manufacturing output on GDP. This hypothesis allowed us to introduce the possibility of structural change, defined as a dynamic process by which the share of manufacturing industry on real output could change over time. In this case, it will be possible to analyze the dynamic properties of the model either in the case where productive structure is kept constant (case with no structural change), as in the case where it evolves over time as a result of some economic process (case with structural change).