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Is the balance of payments constrained growth rate time-varying? Exchange rate over valuation, policy-induced recessions, deindustrialization, and long run growth

Mark Setterfield () and Selen Ozcelik ()

No 1726, Working Papers from New School for Social Research, Department of Economics

Abstract: A long-held view among macroeconomists in the UK and US is that sustained currency over valuation – often the result of financial-sector dominance – weakens domestic macroeconomic performance and results in premature deindustrialization. Similar concerns have been expressed about persistent, policy-induced recessions. According to balance-of payments-constrained growth (BPCG) theory, meanwhile, the BPCG rate in a multi-sector economy varies directly with the share of manufacturing in total output. This chapter develops a simple model that combines these observations to show how a temporary but persistent shock to the nominal exchange rate and/or domestic demand can both affect the actual rate of growth in the short run (by moving it away from the long-run equilibrium BPCG rate), and alter the BPCG rate itself (by lowering the income elasticity of demand for exports as a result of induced premature deindustrialization). The result is a time-varying balance-of payments constrained growth (TV-BPCG) rate. Because actual growth and the TV-BPCG rate vary directly, the latter is also characterized as quasi path dependent.

Keywords: Exchange rate; policy-induced recession; deindustrialization; balance-ofpayments-constrained growth; path dependence (search for similar items in EconPapers)
JEL-codes: E12 F43 O41 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2017-08
New Economics Papers: this item is included in nep-mac and nep-pke
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