An extended structural economic dynamics approach to balance-of-payments constrained growth: level of the real exchange rate and endogenous elasticities

The aim of this paper is to show that the level of the real exchange rate affects the rate of economic growth. More specifically, we extend the model developed by Araujo and Lima (2007) to derive a balance-of-payments equilibrium growth rate analogous to Thirlwall’s Law based on a Pasinettian multi-sector macrodynamic framework in which income elasticities are endogenous to the level of the real exchange. Furthermore, the model is built to relate growth, the real exchange rate and sectoral heterogeneity. We thus demonstrate the effect of the level of real exchange rates on the generation of technological progress, from a cumulative causation perspective, and how these rates also impact the growth of the whole economy via a balance-of-payments constraint approach. Hence, we show that an undervalued real exchange rate has positive effects on economic growth in developing countries.