Patterns of growth in structuralist models: The role of the real exchange rate and industrial policy

This paper presents a Balance-of-payments (BOP)-constrained growth model in which the interaction between the real exchange rate (RER) policy and industrial policy result in the emergence of different patterns of growth and income distribution. The paper relies on cumulative causation à la Kaldor and path-dependency to relate both types of policies. The transition from one equilibrium level of the RER to a new equilibrium level generates a process of learning that transforms the income elasticity of exports and hence the BOP-constrained rate of growth in the long run. The model produces a variety of outcomes that help explain the contradictory results that emerge from the empirical literature on the impact of the real exchange rate on economic growth in the long run.

Keywords: Real Exchange Rage; Structural Change, Growth models, Structuralist models, BOP-constrained growth.

JEL Classification: O33, O40, O41