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Thirlwall's law: Binding-constraint or centre-of-gravity? A possible Kaleckian solution

Marwil Dávila-Fernández and Serena Sordi

Department of Economics University of Siena from Department of Economics, University of Siena

Abstract: Thirlwall’s law is one of the most powerful empirical regularities among demand-led growth theories. In recent years, the challenges imposed by globalisation have led to a new wave of studies incorporating into this framework topics such as ecological sustainability, the complexity of innovation processes, the role of institutions, the composition of external imbalances, and gender issues. We notice some overlapping between two alternative interpretations: one that sees the law as a binding-constraint and another that adopts a centre-of-gravity perspective. It is argued that they are rather complementary. By means of a simple Keynesian multiplier model compatib with Harrodian instability, we show that assuming a balance-of-payments ceiling to growth gives rise to persistent and bounded fluctuations such that the external constraint works as an asymmetric centre-of-gravity. There is no need to impose a floor to output. The model is compatible with different sources of autonomous demand. Numerical simulations show the robustness of our results with respect to alternative scenarios.

Keywords: Dynamic Harrod trade-multiplier; Growth; Open economies; Two-stroke oscillator (search for similar items in EconPapers)
JEL-codes: F43 O11 O40 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-pke
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