Exchange rate misalignment, accumulation regimes and inflation targeting in a post-Keynesian growth model

Abstract

The objective of the present article is to carry out an extension of the Oreiro-Araújo model, incorporating three novel elements to its structure: the theory of conflict inflation between wages and profits, the rule for exchange rate adjustments and the monetary policy under an inflation targeting regime. In the short-run equilibrium, the relation between growth and income distribution - the so-called accumulation regime - depends on the relation between the level of real exchange rate and the its optimum value. When the real exchange rate is overvalued - i.e. below the optimum value - accumulation regime is profit-led. When the real exchange rate is undervalued - i.e. above the optimum value - accumulation regime is wage-led. In the long-run equilibrium, it can be shown that an increase in target inflation is associated with a reduction in the real interest rate and with a real exchange rate depreciation, which induces an increase in the rate of capital accumulation, despite the increase in the rate of inflation.

Keywords:
Economic growth; Income distribution; Accumulation regimes; Real exchange rate misalignment; Inflation targeting