Template-Type: ReDIF-Paper 1.0
Author-Name: Richard Chisik
Author-X-Name-First: Richard
Author-X-Name-Last: Chisik
Author-Email: rchisik@ryerson.ca 
Author-Workplace-Name: Department of Economics, Ryerson University, Toronto, Canada
Author-Name: Nazanin Behzadan
Author-X-Name-First:  Nazanin  
Author-X-Name-Last: Behzadan
Author-Email: nbehzada@ryerson.ca
Author-Workplace-Name: Department of Economics, University of Prince Edward Island, Charlottetown, PE
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Title: The Paradox of Transfers: Distribution and the Dutch Disease
Abstract: In this paper we analyze the effect of within-country income inequality on economic outcomes. In particular, we develop a new model of international trade with non-homothetic preferences whereby within-country income distribution affects the pattern of trade and economic growth. Alternative forms of foreign transfers, such as foreign aid and remittances, interact with the income distribution in dissimilar manners, which in turn generates differences in spending patterns, the real exchange rate, production patterns, and the pattern of international trade. In a three sector model with international trade and production we show that while remittances can foster economic growth, foreign aid can cause economic stagnation. An appreciation of the real exchange rate inducing a production shift to the sector with less long-run growth potential is known as the Dutch disease and in our model the disease is triggered by within-country income differences and the form of the foreign transfer. We empirically verify these hypotheses with data from a panel covering the years 1991-2009 while controlling for the issues of omitted variable bias and the possible endogeneity of foreign aid and remittances.
Creation-Date: 2018-05
Number: 071
File-URL: http://economics.ryerson.ca/workingpapers/wp071.pdf
File-Format: Application/pdf
Handle: RePEc:rye:wpaper:wp071