TITLE:
The Role of Returns to Scale in the Relationship between Exchange Rate and Economic Growth
AUTHORS:
Sofia Neto Paludo, Matheus Silva De Paiva
KEYWORDS:
Exchange Rate, Firm Internationalization, Returns to Scale, Economic Growth
JOURNAL NAME:
Theoretical Economics Letters,
Vol.11 No.2,
March
5,
2021
ABSTRACT: This paper aims to understand how the returns to scale can boost or
deprive the effects of exchange rate depreciation on economic growth. A simple
mathematical model was developed to describe the problem of the exporting firm
in this context of internationalization. Theoretical results show that exchange
rate depreciations can boost the growth of production of firms with
technologies with decreasing returns to scale, while in firms that have increasing
returns of scale, the effect is null or negative. In addition, two important
exchange rates were found for the firm’s decision, namely the minimum operating
exchange rate (MOE) and the reversal exchange rate (RVER). Therefore, the
present model helps understanding the role that the returns to scale plays in
the relationship between exchange rate and economic growth. Finally, the
current study presents a few limitations that can be addressed in future
research. For instance, the following statements can integrate them: 1) allow
that firms to influence the exchange rate and place it above the minimum
operational level; 2) considering new players in the markets considered and 3)
take into account more input and outputs variables.