A Service of zbw The exchange rate, diversification, and distribution in a modified Ricardian model with a continuum of goods DEPARTMENT OF ECONOMICS Working Paper The exchange rate, diversification, and distribution in a modified Ricardian model with a c

Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in UNIVERSITY OF MASSACHUSETTS AMHERST The exchange rate, diversi…cation, and distribution in a modi…ed Ricardian model with a continuum of goods Arslan Razmi September 2010 Abstract Several recent empirical and theoretical studies have revived interest in the relationship between the level of the exchange rate and economic development. This paper develops a dynamic model based on the Ricardian framework with a continuum of goods to consider the issue from a somewhat di¤erent perspective. In the short run, a devaluation can boost pro…ts in spite of real wage rigidity. Moreover, the resulting diversi…cation can o¤set the negative consequences for the trade balance of higher employment and pro…tability at Home. Over the longer run, and in the presence of learning-by-accumulation, the initial boost to pro…ts and investment induced by a devaluation could enable a country to gain a permanent foothold in new sectors at a higher real wage. While directly suppressing the real wage could also lead to diversi…cation, what makes nominal devaluations a particularly useful tool is that these make it possible to expand domestic pro…ts while limiting internal distributional con ‡ict and the ensuing negative e¤ects on development