Foreign Transfers and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy |
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Authors: | Valerie Cerra Serpil Tekin Stephen J Turnovsky |
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Institution: | (1) International Monetary Fund, Washington, DC 20431, USA;(2) University of Washington, Seattle, WA 98195, USA |
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Abstract: | This paper investigates the role of the real exchange rate in determining the effects of foreign transfers. If capital is
perfectly mobile between sectors, a pure transfer has no long-run impact on the real exchange rate. A decline in the traded
sector occurs because the transfer, being denominated in traded output, substitutes for exports in financing imports. While
a pure transfer causes short-run real exchange appreciation, this response is temporary and negligibly small. Transfers allocated
to productivity enhancement do generate permanent real exchange rate adjustments in response to the sectoral reallocation
of productive factors. The analysis, which employs extensive numerical simulations, emphasizes the tradeoffs between real
exchange adjustments, long-run capital accumulation, and economic welfare, associated with alternative forms of transfers.
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Keywords: | Foreign transfers Real exchange rates Capital accumulation |
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