Endogenous income elasticities

This paper deepens the analysis of the income elasticities of import and export demand in relation to the real exchange rate (RER) within a balance of payments constrained growth framework. It identifies how the RER can affect these elasticities and explores the resulting implications. A key highlight is the RER’s ability to induce structural changes toward more complex and technology-intensive sectors. To illustrate this, a formal multisectoral model is presented, demonstrating the conditions under which a higher RER can alleviate external constraints. Finally, several related considerations are addressed.