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Zarzosa Valdivia Fernando and Pentecost Eric Arnoldshain Seminar XI, University of Antwerp 2013

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Introduction: An Australian Model focused on the structural real exchange rate (SRER=P T /P N ) (and the economic structure?) Microfounded Model: Assumptions SRER and the Tradable goods share in GDP (Tshare): Inter- relationships and equilibrium relationships Effects of exogenous shocks on the SRER and Tshare Conclusions

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T N A IAIA 0 SRER A = P T /P N PPF TATA NANA Salter-Swan Model: Fundamentals: SRER-Ec. Structure TFP X, TFP M, TFP N K-L TT DS (debtss-transfers)

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Rational economic agents, CES Pref, Cobb-Douglas T, Linear N Three goods: two tradable goods (Primary and Manufacturing) and one non-tradable goods Two factors with a constant endowment: labour and capital Perfect factor mobility between sectors Exogenous debt service (interest payments) and transfers to GDP, Exogenous terms of trade Perfectly competitive goods and factor markets

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0 Tshare SRER SRER0 E0E0 Tshare0 Tshare C Larger Tshare, creates an excess supply of T excess demand for N, SRER must diminish to switch expenditure from N-T and restore eq CA, Nmkt

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0 Tshare SRER SRER0 E0E0 Tshare P Tshare0

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0 Tshare SRER SRER0 E0E0 Tshare P Tshare0 Tshare C

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0 Tshare SRER SRER 0 E0E0 Tshare P Tshare 0 Tshare C Neary and Purvis (82) Rodrik (2008) and van der Ploeg (2010,2011) Development Models

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Exogenous shocksLinkages Variables Sector TFP shocks Factor endowments Terms of trade Debt service minus transfers PrimaryManu- facturing Non- tradables TFP X TFP M TFP N LKTTDS SRERTshare SRER+- Tshare+++--?+?+ + SRER--+++?-?- + Tshare++---?+?+ + Xshare +--??++ Mshare -+-??-+ The first two rows correspond to the relationships of the Tshare C and Tshare P lines, respectively The third and fourth row are the equilibrium relationships The last two rows shows the response of the equilibrium share in GDP of the primary and manufacturing sectors to exogenous shocks A + indicates a positive effect, a - a negative one and a ? an ambiguous effect; signs in subscripts are valid relationships when TT improvements appreciate the SRER Dutch Disease

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0 Tshare(=θT) SRER θT0 SRER0 Tshare P E0E0 θT d0 Tshare C θ T d0

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0 E01 Tshare(=θT) SRER θT0 SRER0 Tshare P (TFPX0) EPE+ E0E0 E02 θT01θT02θT1 SRER1 RME+ θT d0 (X0) E1E1 θT d01 (X01) θT P (TFPX1) TFPX1 >TFPX0 SE-TE+ Tshare C θ T d0 is derived from

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0 SRER θT02 SRER 0 TshareP(L1) E 02 E0E0 θT0θT1 SRER 1 RME- θT d 0 E1E1 TshareP(L0) L1 >L0 SE+TE- TshareC Tshare(=θT)

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0 E01 Tshare(=θT) SRER θ T0 SRER0 Tshare P (TT0) EPE+ E0E0 E02 θ T01 θ T02 θ T01 SRER01 E1E1 Tshare P (TT1) case (a) TT1 >TT0 RME+ SE-TE+ E01 PE+ θ T1 SRER1 Tshare C θT d0 (TT 0 ) E02 E1E1 θ T02 θ T1 RME- SE- TE- Tshare P (TT1) case (b) Case (a) Case (b) SRER1

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0 E1E1 Tshare(=θT) SRER θT1 SRER0 E0E0 SRER1 E02 θT0 DS1 < DS0 θT02 Tshare P Tshare C (DS0) Tshare C (DS1) EME- SuE+SE-=TE- θT d0

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Extraordinary Profits effects Price effects Resource Movement effects Expenditure Movement Effect Substitution Effects Spending effects Total Effects Tradable share SRER TFP X ++-+Inc.App. TFP M ++-+Inc.App. TFP N --+-Dim.Dep. TT++ +-+Inc.App. -+-Dim.Dep. DS+ - ++Inc.Dep. A plus (minus) indicates that the corresponding shock increases (decreases) the tradable share Inc. and Dim. indicates that the tradable share increases or diminishes, respectively App. and Dep. refer to appreciation and depreciation, respectively

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Theoretically: SRER, Tshares are simultaneous determined Role of Fundamentals: TFPs, L-K, TT, DS; TT and DS may give rise to the Dutch Disease Measuring resource allocation as the change in the Tshare, the EPE, PE, EME, RME, SuE, SE of exogenous shocks are identified and distinguished

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T N A IAIA 0 SRER C SRER A PPF B C TATA TBTB TDTD IBIB NANA =N B TCTC D NDND NCNC

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T N A IAIA 0 SRER C SRER A PPF B C TATA TBTB TDTD IAIA NANA =N B TCTC D NDND NCNC EPERME SE TE

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Structural real exchange rate (SRER) Universidad Nacional de Córdoba

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SRER and RER PPP exogenous

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SRER(log(100-u)) 0 Tshare SRER SRER0 E0 GM L(SRER) Tshare P log(100-u)L0L0 E0 GE Tshare0 Tshare C (SRER) Produced Required Dollars required to correct the current account L1L2 Unemployment expected 1 2 Real Depreciation required ( P N or devaluation) or Productivity, Inv, gov.spending that falls in non-tradables A212 SRER1

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SRER(log(100-u)) 0 Tshare SRER SRER0 E0 GM L(SRER) Tshare P log(100-u)L0L0 E0 GE Tshare0 Tshare C (SRER) Produced Required Dollars required to correct the current account L1L2 Unemployment expected 1 2 Real Depreciation required ( P N or devaluation) or Productivity, Inv, gov.spending that falls in non-tradables Aggravate US$: reserve

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