Economic *growth, income and regional inequality, and real exchange rates

This dissertation examines the issues of the impact of personal income/wealth inequality on growth, how regional income inequality affects and is affected by economic growth, and finally how long-term current account sustainability affects the determination of current real exchange rates.;Chapter 2 presents a political economy model that provides an additional explanation to the negative relationship between initial income and wealth distribution, and long-term growth performance. Opposed to other models on the subject, we have allowed distributive policies to take the form of resource accumulation---human capital in our case---raising the marginal product of physical capital.;In this model two different groups present distinct, endogenously generated, preferences on government policy, and the different solutions to such conflict implies different secular growth rates. More specifically, owners of physical capital favor policies that maximize growth, whereas owners of human capital favor policies that unequivocally reduce the long-term growth rate. As the difference between these two groups is essentially related to the initial endowment distribution, we can rationalize the negative correlation between income or wealth inequality and growth mentioned above.;In chapter 3 we use regional data on output per capita for Brazilian states to assess the rate of output per capita convergence across them. We find that poorer states do tend to grow faster than richer states, and that output per capita is converging towards the steady state at the rate of 3% per year. This speed implies lengthy transitional periods, so regional inequality is likely to persist for some time.;Furthermore, there is evidence that the speed of convergence is stable over time. The evidence also supports the hypothesis that all Brazilian states are converging towards a common steady state, although output per capita dispersion should remain high. This finding challenges a "sociological" explanation for regional inequalities, which rests on cultural differences between Brazilian regions.;From a more abstract standpoint, these results conform to the qualitative implications of the neoclassical growth model. However, our quantitative findings add to the mounting evidence that an extended version of this model can perform better in explaining economic growth.;Finally, in chapter 4 we attempt to develop a methodology for assessing the deviation of the real exchange rate from its long-term equilibrium level from a current account sustainability perspective. This methodology represents an alternative to traditional purchasing power parity (PPP) calculations, partially based on the trade elasticities approach. Our original contribution is the explicit introduction of long-term current account sustainability considerations in the determination of a target primary current account surplus.;We develop a special case, in which the long-term equilibrium real exchange rate is one that generates a constant stream of primary current account surpluses whose present value matches the country's current net foreign liabilities. Then we apply the methodology to Brazil during the second half of the 1990s, to find that the Brazilian currency required a depreciation of about 20% prior to its devaluation in 1999.