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395-413, July-September/2018
A formal assessment of
new-developmentalist theory and policy*
Uma avaliação formal da teoria e da
política novo desenvolvimentista
Ariel Dvoskin1
Germán David Feldman2
* A preliminary version of this article was presented at the 2nd New Developmentalism’s Workshop, ‘Theory
and Policy for Developing Countries’, São Paulo, August 4-5, 2017 and at Research Seminar of the Institute of
Economics – Federal University of Rio de Janeiro (IE-UFRJ), RJ - Brazil, August 8, 2017. We would like to
thank the participants of both events for their comments and suggestions. All the remaining errors are ours.
1
CONICET/Institute for High Social Studies (IDAES), National University of General San Martín
(UNSAM), Argentina. E-mail: advoskin@unsam.edu.ar.
2
CONICET/Institute for High Social Studies (IDAES), National University of General San Martín
(UNSAM), Argentina. E-mail: gfeldman@unsam.edu.ar. Submitted: 4/November/2017; Approved: 3/
February/2018.
INTRODUCTION
3
See Bresser-Pereira (2008, 2012, 2016) among other contributions. See also Oreiro et al. (2015).
ANALYTICAL FRAMEWORK4
4
This framework heavily draws on Dvoskin and Feldman (2017a) and (2017b).
The four equations have seven unknowns: !! !! !! !!! , !!! , !!! , !!! . If we take nomi-
nal wages as given:
!!! [5]
There are still two degrees of freedom left.
Furthermore, at the level of abstraction we are working with, we can safely
assume free capital mobility across countries. This means that the rate of profits is
determined by the international rate (r*):
r = r* [6]6
There is still one degree of freedom left. Before we suggest how to eliminate it,
let us consider the abovementioned feature ii) of the productive system, i.e., the
5
For simplicity the analysis abstracts from absolute rent. The role of differential rent will be discussed
in the third section below.
6
Notice that in Bresser-Pereira et al. (2014), the assumption of a given rate of profits is obtained though
a different reasoning, namely, by highlighting the connection between the rate of profits and an exogenously
given mark-up. However, we keep the specification of the model with equation [6], since in Bresser-Pereira
et al. (2014) the connection between the domestic rate and the international rate is still missing.
!! !!!!!
is what
The level of !! ! !
!!!
new-developmentalist authors denominate the “current
equilibrium” exchange rate (Bresser-Pereira, 2008, pp. 53-55).8
Where the level EI is what ND authors call the “industrial equilibrium” ex-
change rate (Bresser-Pereira, 2008, p. 53-55)9. Figure 1 (left-hand side) represents
the shape of these curves:
7 ! !
There is a third possibility, that !! ! !! , which is fulfilled under the presence of differential rent. This
third case will be explored in the third section below.
8
Bresser-Pereira (2008, p. 55) formally defines the value EC as the ratio between what he denominates
the “market price” of C (which is determined by “the marginal cost of the least efficient producer”, and
!
hence coincides with !! of equation [1]) and the international price of C. It is therefore equivalent to
the level of E obtained from [8].
9
Bresser-Pereira does not offer a formal definition of EI, but he does define the “necessary price” of a
generic industrial good as “the price that makes economically profitable to produce other tradables
[other than C] using technology in the state-of-the-art”. It therefore coincides with !!! in equation [2].
And “The ‘industrial’ equilibrium exchange rate [is] the one that enables the production of tradables in
the country without the need of duties and subsidies […] the exchange rate that, on average, allows
companies using state-of-the-art technology to be profitable or competitive” (Bresser-Pereira, 2008, p.
54). This is, in other words, the level of E that arises from condition [9].
E E
w I w I C
ÊI C ÊI C
w w
1
ÊC ÊC
w w
w w
-1 r* r -1 r* r
The curves have two intersections. The first one is at r = –1, while the second
one is at:
p*I pC* lI
p*I
p* l
(1 + rˆ) = kp* − kpC* l I (1 + rˆ) = kp *
−
kp*K lC
[10]
K
K K C E
C
Therefore, the real wage w is univocally determined once the level of E/w is
E
known, and shows an inverse relationship withp*the latter. pp* * lI According
pC* lI to a well-
known result of choice of techniques (see
B
( + rˆ ) =(1and
1Kurz + I*rˆ )Salvadori,
kpK kp
−= C*I* − 1995,
kpKK lC kpK lC*
ch. 5), all this
means Ethat
I the economy
C will fully specialize in the sector
p*I pthat,
*
lI given the rate of
(1 + rˆis) =none
profits r*, can afford the lowest E/w ratio, which −
other
kp*K kp*K lC
C
than the sector that
can pay the highest w Therefore, if r > rˆ (r < rˆ ) the economy will fully specialize
in the Eproduction of industrial goods (primary goods). While, the coexistence of
the sectors will occur only by a fluke, at r = rˆ 10.
EI
EC A
10
Note that when the production of morew than two commodities is considered, in general there will be
EC pC*
no level of r that will allow the coexistence C
of all sectors. On this point, see Steedman (1999, p. 272)
and Baldone (2001).
!!! =! !!!!!!!!!"!!!!!!!! ! ! ! !
E/W [13]
p*I pC* lI
(1 + rˆ!) != !kp* − kp* l
!! !!!!!!!!!!!!!!!!!!!
K K C
From conditions [10] and [11] it can be seen that, given the terms of trade, the
size of the interval [0; rˆ ] (the range of full specialization in I) will be smaller the
higher is i) the import coefficient of the industrial sector (k)p*Iand pii)
*
the
lI higher the
(1 + ˆ
r ) =
labor productivity of the primary sector vis-à-vis labour productivity − C
trial sector. On the other hand, given technical conditions, this range will be small-
er the higher are the terms of trade in favour of the primary sector. (Notice inci- p* p* l
dentally that, if condition [11] does not hold, then rˆ ≤ 0. This means that(1there+ rˆ ) =will I* − C* I
kp kpK lC
be no positive value of the rate of profits that would induce the economy to fully K
specialize in the production of the industrial good.) For Latin American countries
in recent decades, these conditions suggest that, if any, the interval [0; rˆ ] will be
small, and hence, without protection the economy will fully specialize in the pro-
duction of commodity C. In fact, this is the kind of productive structure envisaged
by ND authors, and can be easily represented in terms of our model if, given
the rate of profits, E (the “market exchange rate”, as the ND authors call it), is
endogenously determined by the “lower branch” of condition [13], i.e., at the
level E = EC. This is how the last degree of freedom is eliminated. Then, equa-
tions [1]-[2]-[3]-[4]-[5]-[6]-[13] are enough to determine the following variables:
pIS , pCS , pS Id , pS Cd , w
d
, r ,d E
pI , pC , pI , pC , w, r , E
We finish this section with the following premark: S while the NDP assumes a plau-
, pCS , pId , pCd , w, r , E
ˆ≤0
sible rproductive structure for LA countries, the I
proponents of this approach seem to
rˆ ≤ 0 pIS economies
, pCS , pId , pCd , wunder
, r , E consid-
conceive this configuration as a purely technical aspect of the
eration, rˆ ≤ 0
E I >while
EEC >our EC
framework has revealed that this outcome will generally depend on
income distribution
I (except under the special case in which rˆ ≤ 0 ). In other words, ND
authors believe that it is always the case that EI > EC , while it is perfectly conceivable
rˆ ≤ condition
that the 0 rˆ ≤0 0< r * 0<<rˆr * < rˆ holds, and hence, since in this case EI < EC, it is convenient
E I > EC
for the economy to specialize in the production of industrial
rˆ ≤ 0 0 < r < rˆ * goods.
rˆ ≤ 0 0 < r * < rˆ
“RICARDIAN RENTS” IN THE BASIC FRAMEWORK
At this point of the exposition we should note that the inverse relationship be-
tween r and w/E that emerges from the canonical model is modified once we recall
that, according to the NDP, good C is produced by employing a fixed factor whose
exploitation under “conditions of extraordinary productivity” allows the sector to
earn “Ricardian rents” (Bresser-Pereira, 2008, p. 50). If we assume full employment
!! ! ! ! !! !! !! ! !! [15]
Figure 2 illustrates this relationship.
I C w
C E
1
w
EEq
r* r w G
C
EC pC*
11
It is not necessary to assume the full employment of the whole stock of land. It is sufficient to assume
that the land of “best quality” is fully employed. For our purposes, however, it is enough to assume that
land is homogeneous and fully employed.
12 E
This does not imply denying the possibility of a direct relationship w between E and r. ButI such
E C
relationship will lack the same degree of generality that would be observed in the absence of rent. For
instance, one could assume in a rather ad-hoc way that devaluation expectations can influence the level
of the rate of profits. In this case, the equation that connects the domestic rate of profits with the
EI international rate should adopt the following alternative form: r = r*+ µ (E). Where not only does µ (E)
E EI ( ~ EC (
represent the specific risks of investing in the domestic economy,w but= wit is= also
w postulated that those risks C’
increase with E, given the potential positive effect of devaluation on the perceptions on the future
E evolution of the exchange rate. That is, µ'(E) > 0. It is clear, anyway, that being based on purely
E EC
subjective elements, and thus, subject to the influence of a potentially = w
w infinite variety of factors, this
relationship lacks general validity. It is conceivable, in fact, that µ’(E) < 0.
EC
402 Brazilian Journal of Political Economy 38 (3), 2018 • pp. 395-413
r* r
-1
w
The rent is maximum p* pwhen
*
lI wC is zero, and it disappears when the real wage
(1 +compatible
is the highest rˆ ) = I* − with
kpK kp*K lC
C
the existence of sector C at the level r*, which occurs
when E = EC.
pCS , pId , pCd , w, r , E , ρ{}pIS , pCS , pId , pCd , w, r , E , ρ}
{ pIS ,the
Before stressing second implication, notice that since EI >EC (or equiva-
lently, r* > rˆ ), at the level E = EC commodity I cannot be profitably produced when
its international price pIS > is EC p*I (that is, pIS > EC p*I ). Therefore, its production can only
be sold in the domestic market, provided that there exists some kind of extra-
economic measure that forbids imports of competing goods from abroad and/or
tariffs that increase the selling price of the foreign commodity13. Then, the second
implication is that the additional degree of freedom of the price system allows set-
ting the exchange rate at the level EI to allow the international competitiveness of
the industrial sector. Formally, this means that E is determined at the level EI in
[13], while sector C earns a persistent extraordinary rent per unit of output. We
thus have 8 equations ([1]-[2]-[3]-[4]-[5]-[6]-[13]-[14]) in the following variables:
{ p , p , p , p , w, r , E, ρ}
S
I
S
C
d
I
d
C
S *
pI > EC RATE
THE LEVEL OF THE EXCHANGE pI AND THE BEHAVIOUR OF THE
CURRENT ACCOUNT
In our basic framework, the level of E that the economy tends to realize, the
“market rate” as Bresser-Pereira calls it, is the outcome of a problem of technical
choices. In the absence of rents, given the rate of profits and the relevant conditions
of production, we have argued that it was plausible to assume that this level would
gravitate around EC for Latin American countries (see conditions [10] and [11] in
the second section). While it could be set at higher levels (including the level EI)
when differential rents were considered (third section). For ND authors, on the
contrary, in these economies the action of market forces causes the effective ex-
change rate to necessarily gravitate around the level EC. The reason is that this is
the only level that ensures the equilibrium of the current account: “The ‘current’
equilibrium exchange rate [is] the one that balances intertemporally a country’s
current account and that is therefore also the market rate, the rate on which the
market shall converge.” (Bresser-Pereira, 2008, p. 53).
We should note at this point that the previous claim combines three different
statements: The first two are rather straightforward: a) that the minimum level of
the exchange rate that ensures viability of sector C, EC, is also the level that ensures
current account equilibrium, say EEq; b) that neither current account deficits nor
surpluses can be sustained in the long run. And finally, c) it is also implicitly argued
that the balance of payments can be brought into equilibrium only by adjustments
in income distribution (in the w/E ratio).
!
!! ! !!! !! ! !!! !! ! ! !"! ! [16]
!
!
!
w
E
w CC<0
EEq
CC>0
CC=0
C
G G
The curve is negatively sloped since a rise in the real wage increases PC and
hence imports. For a given level of exports, equilibrium in the current account needs
a Edecrease in the level of G. To the right (left) of CC = 0, the economy is in a situ-
w
ation of external deficit
I (surplus) since for a given real wage, the level of public
C
expenditure is too high (low).
We are now in position to assess whether the abovementioned statements a), b)
–
and
E c) hold or not. To assess claim a), notice that if we fix the level of G at G in
E EI ( =~ Figure
(
C
w = w w C’ level of E = E that, given money wages, equili-
3, there is a corresponding Eq
brates the external sector. And there is no reason why EEq should be equal to EC, since
E EClatter solves equation [8], while the former is the solution of CC(w/E,G) = 0. The
w the
= w
coincidence between EC and EEqwill therefore occur only by a fluke. And this denies
the first statement.
Let us consider statement b), namely whether surpluses or deficits in the cur-
-1 r* r –
rent account are sustainable when, given G = G, the effective rate that emerges from
In other words, EC and EEq must be seen as the minimum thresholds of the
–
effective exchange rate E.
14
While for Frenkel the sustainability of the external surplus depends on the Central Bank’s decision
to fix the exchange rate and the size of the intervention in the foreign exchange market vis-à-vis the
practical limits of monetary sterilization, for Lavoie, who follows the Post-Keynesian endogenous money
doctrine, compensation mechanisms are endogenous in nature. We will not discuss here whether the
compensations mechanisms are exogenous (Frenkel) or endogenous (Lavoie). Our point is that there
seems to be agreement among heterodox scholars that these mechanisms exist and are effective.
15
We are of course assuming that the economy in question does not issue the currency that is
internationally accepted as a means of payment.
16
This possibility is recognized, for instance, by Latin American Structuralist authors, such as Canitrot
(1975).
lC pI − kpK (1 + r ) [18’]
For w rate of profits and terms of trade, dh positively depends on the degree
a given
Eα = w*
Eα = ωα pheterogen
of structural C eity of the economy, namely: a) the relatively low labour pro-
ωα pC*
ductivity of sector I and b) the high import coefficients of this industry. From condi-
tions [10] and [11] (see the second section), both factors suggest that for Latin Amer-
ican peripheral economies, dh, and therefore the required rate of devaluation, could
be drastic. This implies that the target exchange rate, EI, may not be socially feasible.
To see this it may be useful to recall that there is a sort of hierarchy among
commodities: the reason is that good C can be conceived as the only consumption
17
The Dutch Disease problem will be discussed in the following section.
EI
EC
w
EC pC* C
E = E I = EC EI
EC A
pC*
w
EC pC* C
E 'C
Revista de Economia Política 38 (3), 2018 • pp. 395-413 407
r -1 r* r w C
EC pC*
EI
E EI ~ EC
w = w (= w
(
E
E EC
w = w
EC
-1
w
EC pC* C
w
EC pC* C
Its lower limit is EC, since below this level commodity C cannot be profitably
produced; while its upper bound is given by Ea, since above this value workers are
not able to consume the quantity a of C. Finally, the figure shows that, since Ea >
EI, either the industrial sector does not earn the normal rate of profits or, alterna-
tively, workers are not able to consume the minimum amount of the necessary good.
In the following section we will discuss how the problem manifests itself with-
in the New-Developmentalist framework, and its possible solutions.
Then, the argument follows, the discovery of a new natural resource allows
exploiting C under particularly favourable conditions. This decreases C-supply
price:
w
ωC =appreciation
dency towthe C
E ∈of Ethe
C
; Edomestic
α
= E I ( ≅ ECtowards
Ecurrency ) pC the
G< Eplevel
C
E = EC 18, now
G
S *
EC pC* EpC*
considerably lower than EI . And this provokes, in the absence of protection, the
19
E
w I
pC* C
E 'C
E EI ~ EC
w = w (= w
(
C’
E EC
w = w
-1 r* r
C
According to the NDP, the “correct way” (Bresser-Pereira, 2012, p. 66) to solve
the problem consists in implementing a tax (θ ) on C-production that increases the
E
supply price of this commodity p S =( pCS )(1(or
+ θ ),what
with 1Bresser-Pereira
+θ = I denominates its “nec-
Cθ
EC
essary price”), and therefore its demand price, by appropriately rising the level of
EC. The new supply price is: S
pC (1 + θ ) = EC pC*
S S E
EI
p =p
pCSθ = S θ
pCCS ((11p+
+ ), S with
θ= ), with +θ
11 + θ= =1 +EθI = EI [23]
p (1 + θ ), with
Cθ Cθ C
EECC EC
Cθ
EI
= Cθ
C
C
= E , ( with E >E )
From condition [23] it follows θ ) the
(1 +that equality of demand and supply prices
S
for Cp is +
S (1nowθ ) pC E
= S
pCC (1 + θ ) = ECC pCC
*
(1 +pθ*) = EC pC , which means that the new (and higher) level of the
*
ECCθθ = (1 + θ ) = E II , ( with E
E = ECCθθ > >E ECC )) [24]
(1 + θ ) Eα = (1 − τ ) E I
The tax allows E I viabilityEof
E = E re-establishing
E = E I (τ ) Econdition
= EC E I [21],
> Eα >and
EC ( =hence
E) the 1 − τ = α the
industrial sector. However, this solution w isw inflationary and it mayCE E therefore Eface
IE E a
E = E E = E (τ ) E = E = E =>ωE > E ωCE ) E = EEC II
E −( = 11−−τ =τ =C Eαα
“majorE= E
political = E II (τ ) since
E obstacle”, (1 − E =I E
τ )the
E E
pCreal-wage
*C E p
C
*
α CI
E
I > fall
α α >
α in E C ( = E )of tradable goods
terms
C E 1 − τ =may
E I E
ECC E II
Eα =w (1 −of
tackle the resistance τ) Ethe working class (Bresser-Pereira, 2008, p. 59).
E = E I ( ≅ EC )
I
ωC = E ∈ EC ; Eα S *
pC < EpC E = EC
EpC* w
w ( ≅ E E) = E I (p≅S E ) C*
= ((11 −
− ττ )) E
ωC = * ωC =E ∈ * EC ; Eα E ∈ ECE; E=α E pECS < *
< CEp = Ep
EC C
E
Eαα = E IIw w EpC EpC
E
I C C
= = ωα E − ωC E = EC 1− τ = C
w
τ < EpC* E I E = EC
*
18
(1 − ω ) E= p E p*
α CE ∈ E ; E E = E ( ≅ E ) p S
In the light ofEour C I C*
= E Idiscussion
= EC Ep of the third section about the relationship
C α I C C between the level EC and EEq,
we will herew
wassume that Ew E
C
E = E I = Erate
wC ≥ EEq and hence the Eeffective
= E I = Eexchange will gravitate
EC around EC
= =ω
= E
E−−ω E
E==E 1−
1 − ττ =
C C
*
p ** = ωα ωC EC E = C
− ττ )) E
((11 − E II Cppeffect E ppC** discovery
19
An analogous to
Eαthe of a natural
C resource may C be obtained if
C
α
pC*
Einitially
I
both sectors
are equally efficient C (E = αE =
I
C E ) and a rise of p* takes place,
C C allowing sector CI to tolerate a lower
exchange rate, E 'C . At the initial level of E, there will exist a foreign exchange inflow due to the price
effect, which will pushp*the exchange rate towards E 'the level E 'C .
C C
E 'C
Revista de Economia Política 38 (3), 2018 • pp. 395-413 409
EI
p S = pCS (1 + θ ), with 1 + θ =
Cθ
EC
pCS (1 + θ ) = EC pC*
There are several aspects of the Dutch Disease that are worth discussing. First,
EC
notice that when the problem ECθ =manifests = E I , (itself,
with ECthe θ C)
> Edistributive conflict has already
(1 + θ )
been solved, since the tax limits to counteract the pervasive effects of appreciation,
and hence increases the level of exchange rate, and therefore reduces the real wage,
EI E
only up to its initial value E = E , which E = E I by(τhypothesis
) E = EC was E I >socially
Eα > EC ( =viable.
E) 1− τ = α
EC E
Note in any case that, at first sight, there seems to be no way to avoid the I
potential inflationary pressures associated Swith Sthe neutralization EofI the disease by
Eα = (1 − τ ) E I p = p (1 + θ ), with 1 + θ =
means of the tax. At closer inspection, however, Cthis is the result ofEthe
Cθ
C
assumptions
underlying NDP’s framework, in which the only way to induce an increase in the
w w EC
level of the effective exchange rate is = through =S ωα an increaseE − ωC* E EC supply
in= the 1 − τ = price of C,
(1 − τ ) E I pC* Eα pC* pC (1 + θ ) = EC pC EI
since the presence of differential rents in “equilibrium” is neglected.
As we have already seen, on the contrary,Ethe moment these rents are suffi-
ciently persistent, monetary authorities E can =manage C
= Ethe , ( with
nominal )
ECθ > ECexchange rate
S S
Cθ
(1 + θ )E I I
p = p (1 + θ ), with 1 + θ
directly (without relying on the Caid of a tax), evenE if the rate of profits is exoge-=
Cθ
C
nously given. Therefore, it is possible to eliminate the competitiveness gap of the
EI
industrial sector by raising ES up to its initial E =levelE E = E I . Like (τ ) theEtax = Eon C
E I > Eα > EC ( = E )
production
pC (1 + θ ) = EC pC *
EC
costs, this policy alone is inflationary too. In this case, however, it limits itself to
increase the demand price of C, but does not alter itsE supply price (in other words,
= pECSchange),
p S not (1 + θ ), with E = (11+−θτ )=E I I
the original value of EC does ECθ = C
Cθ = E I , (αwithandEtherefore> E ) its inflationary effect on
the necessary good C can be avoided. (1 + θ ) To achieveCθthis CCgoal, it is enough that, at the
S S E
same time, the Government Simposes a tax onw exports w(t) that pfixes = pthe θ ), with 1 + θ = I EC
(1 +exchange
E
p (1 + θ ) = EC pC p = p (1 + θ*), with 1 +*θ = α
* S S = = ω
E I E − C
ω
Cθ E = E 1 − τC=
E
p S =ofpCStaxes
rate net (1 + θ ),faced
with 1by + θC=C atI the lower (1 − τ ) E I pC Eα. pThis
C
E I Ca EαE I
E = E I (τlevel E = EC C EEI >isEnone other than
C
E = EE ) > E ( = E ) 1 − τ =
Cθ
C
Cθ
α C
C
compensated devaluation policy, or effective exchange rate differentiation, endorsed E C
EI
EC S
p (1 + θ ) = E p *
pCS (1 + θ ) = EC pC*
by several old Latin American ECθ =Structuralist = E , ( with
C
scholars,
ECθ > ECthe
C C
) Argentinean economist
pCS (1 +Diamand
θ ) = EC pC* (1972) among (1 + θ ) 20 I
Marcelo Eα = (1 − them τ ) EI . E
E = C
= E , ( with E > E ) E
To see how this works, let us recall that(1 E + θ ) is the maximum ECθ =levelC of= the E I , ( with
ex- ECθ > EC )
Cθ I Cθ C
a
Etolerable (1 + θ ) , which EI E
changeECθ =
rate C by workers,
= E I , ( with ECE
and
E ) E = EwI (τ )
>= w
E
further assume E = EC that E I > Eα > EC ( = E ) EC E 1 − τ E= α
+ θ ) gross rate of θ C = = ω E − ω E = E 1 − τ = E EI
means that(1the (1 −devaluation
τ ) E I pC* Eα prequired
E* = E α E = Eby (the τ ) Cindustrial
I
E=E EC >sector,
C
E > E ( =dh
I α
E) = C , 1 − τ =
EI E
C
E
I α
C C I
I
at E E= =E I1 workers are now able to consume the minimum amount ( a ) of
( − τ ) EI
α C C
( 1 − τ ) E p
I C
*
E p
α C
*
E I
α
the necessary good, since: w w
= = ωα E − ωC
(1 − τ ) E I pC* Eα pC*
w w E
= = ωα
E − ωC E [25]
= EC 1− τ = C
EC (1 − τ ) E I pC* Eα pC* EI
1− τ =
EI
This is shown in Figure 7 by means of the E-wC equilateral hyperbola introduced
in the fifth section. An export duty of magnitude t shifts the curve upwards (dotted
line), and allows a higher real wage for each level of E. Moreover, the effective ex-
20
See Dvoskin and Feldman (2015) for a formal reconstruction of Diamand’s thought.
w
E p* C
change rate for the industrial sector is equal CtoC EI, while the one faced by sector C
is Ea.
EC
ECθ = = E I , ( with ECθ > EC )
(1 + θ )
E
EI
p S = pCS (1 + θ ), with 1 + θ =
Cθ
EC EI Eα
E=E E = EI (τ ) E = EECI AE I > Eα > EC ( = E ) 1− τ =
EC * EC EI
pCS (1 + θ ) = EC pC
E
(1 + θ )
(
=α = C 1 −= τE I ,E
ECθ E )
( with
I ECθ > EC )
w
EC pC* C
w w EI EEα
E=E
Then, if we E = Efrom
depart =(τ ) a situation
I
E=E
= ωα Ein> E
E −which C I α 11−− ττ A),
ω>C E (= EE )= ECE (point C
=
= E Cdevaluation
(1 − τ ) E I pC* Eα pC* EI C I
from EC to EI causes a fall of wC, but, thanks to exchange rate differentiation, the
distributive limit (1 − τ not
E = has
α ) E been surpassed (point C), as it would have occurred with
I
a standard devaluation (point B). Finally, notice that the inflationary pressures
w w E
could be fully(1neutralized
− τ)E p
= *
E p
if= the
ω Government
E −ω
* α
E = Esets 1 − τ =
C
E
, since in this case the
C
C
I C α C I
maximum rate of C-consumption, wC, will remain at its initial level.
CONCLUDING REMARKS
REFERENCES
21
See Blecker (1989, p. 404).