A reconciliation proposal of demand-driven growth models in open economies

Abstract

Purpose-This paper seeks to contribute to the literature on demand-driven Keynesian 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, based on the model developed in this paper, we analyse more broadly some important issues concerning the net impact of currency depreciation on the short-run growth. Design/methodology/approach-We build upon Dixon and Thirlwall's (1975) export-led growth model and Thirlwall's (1979) balance-of-payments constrained growth models in order to develop our theoretical framework. We also run numerical simulations to illustrate the net impact of devaluation on the short-run growth rate in different scenarios. Findings-We demonstrate that the net impact of currency devaluation on growth can go either way, depending on some structural 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 nominal 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. Research limitations/implications-This paper provides a coherent formal starting-point for further theoretical developments on the interrelatedness between currency devaluation, income distribution and growth. These findings provide empirically testable hypothesis for future research. Originality/value-The present study proposes an alternative formal solution for the theoretical problem of imposing a balance-of-payments constraint on the process of cumulative causation often incorporated in Kaldorian growth models. In terms of policy, our framework sheds further light on the relevance of income distribution and the labour market institutional framework for the dynamics of the exchange rate pass-through mechanism and allows us to map out related conditions under which currency devaluation can promote growth. Keywords balance-of-payments constraint, exchange rate, income distribution.

Thirlwall's law is not a tautology, but some empirical tests of it nearly are

“…In fact, some of the recent work of Professor McCombieespecially the 'grand synthesis' model of Ribeiro et al (2017a) may be interpreted as consistent with such a view. This model does not imply that countries always grow at the long-run, Thirlwall's law growth rate over any given historical period.…”

“…Blecker and Ibarra (2013) combined the latter two into final goods. For an alternative way of incorporating intermediate imports into a BPCG model, see Ribeiro et al (2017a;2017b).…”

“…We devoted two chapters to this approach precisely because we thought it was so significant and the literature on it is so vast that we could not do it justice in one chapter. The book concludes with a (very favourable) presentation of an article co-authored by McCombie (Ribeiro et al 2017a), which neatly synthesizes a Thirlwallian approach to the long run with a more Neo-Kaleckian framework for the short and medium runan article we characterize as providing 'a grand synthesis' (Blecker and Setterfield 2019, pp. 502-510).…”

Tests of a more comprehensive model of economic growth in lower middle-income countries

“…Building upon Dixon and Thirlwall’s (1975) export-led growth model and Thirlwall’s (1979) balance-of-payments constrained growth model, Ribeiro et al (2017) found that the net impact of currency devaluation on growth can go either way, depending on some structural 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 nominal wages through the bargaining process. They also showed that the effectiveness of a competitive real exchange rate to promote growth is higher in countries where the share of labor in domestic income is also higher.…”

Sustainable Growth: Grow and Broke Empirical Study on Manufacturing Sector Companies Listed on the Indonesia Stock Exchange

“…Growth is a concept that is widely used in various philosophies of science and has various meanings as the process of improvement. In economics, the term growth is associated with the process of development, expansion and acceleration (Akalpler, 2018; Chen, 2018), while, in business terms, growth is interpreted as an increase in economic or business capacity in terms of producing/selling products or services (Pradhan, 2017; Ribeiro, 2017;Saripalli, 2017). Therefore, growth is used in business enterprises as an indicator of success, such as the rate of economic growth or revenue growth rate.…”