A reform to remove the external constraint

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Chapter 5 in Development Macroeconomics, 2020, pp 210-255 from Edward Elgar Publishing

Abstract: To find a solution to the external constraint problem, this chapter considers the structure of international payments in more detail. Based on a simplified approach to Bernard Schmitt’s analysis, it is shown that deficit countries pay twice for their net imports. This is the core reason why the external constraint prevents a sustainable growth path. Elaborating on a reform the elements of which have been proposed by Keynes, Schumacher and Schmitt, it is shown how the system of international payments can be put on a sound monetary basis, which not only prevents the duplication of international payments but also ensures exchange rate stability and rules out foreign debt accumulation. Moreover, it also avoids the harmful effects of capital flight. Hence, thanks to the reform, the external constraint is removed. The state has its scope of action back so that it can implement the policies suggested in Chapter 3. The beneficial effects of the reform are demonstrated with the final extended version of the stock-flow consistent model.

Keywords: Development Studies; Economics and Finance (search for similar items in EconPapers)
Date: 2020
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