A Reconciliation Proposal of Demand-driven Growth Models in Open Economies

Rafael Ribeiro () and Gilberto Tadeu Lima John S. L. McCombie
Authors registered in the RePEc Author Service: Gilberto Tadeu Lima and John Stuart Landreth McCombie

No 2016_01, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: This paper seeks to contribute to the literature on demand-driven Keynesian models of growth in open economies by developing a formal model that combines Dixon and Thirlwall’s (1975) export-led growth model and Thirlwall’s (1979) balance-of-payments constrained growth models into a more general specification. Then, we built upon the model developed in this paper in order to analyse more broadly some important issues concerning the net impact of a currency depreciation on the short-run growth rate. We demonstrate that this impact can go either way, depending on some conditions such as the average share of imported intermediate inputs in prime costs of domestic firms and the institutional capacity of trade unions to set wages through the bargaining process. The model also shows that the effectiveness of a competitive real exchange rate to promote growth is higher in countries where the share of labour in domestic income is also higher. Lastly, we run some simulations to illustrate the impact of a devaluation on short-term growth rate in different scenarios. The simulations demonstrate how the pattern of convergence of the actual growth rate towards the equilibrium growth rate is intrinsically linked to the institutional framework of the economy.

Keywords: Balance-of-payments constraint; exchange rate; income distribution (search for similar items in EconPapers)
JEL-codes: E25 O33 O40 (search for similar items in EconPapers)
Date: 2016-01-15
New Economics Papers: this item is included in nep-mac
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Journal Article: A reconciliation proposal of demand-driven growth models in open economies (2017)
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