Limits to Fiscal and Monetary Policy in Small Open Economies

Impacts of US Interest Rates on Growth, Income Distribution, and Macroeconomic Policy Space in Developing Countries: A SFC Supermultiplier Model

“…and Torchinsky Landau, 2023). By doing so it aims to investigate how long-run growth is affected by external and internal policy in an open economy with open capital accounts and how the liquidity provided by reserves may mitigate the effects of possible external shocks.…”

“…It builds upon the open economy neo-Kaleckian supermultiplier model by Nah and Lavoie (2017) while including the public sector as in Hein (2018). We also consider the role of external debt and financial flows inspired by the work of Morlin (2022) and Dvoskin and Torchinsky Landau (2023), but further considering results of taking full consideration the stock-flow dynamics in line with the tradition after Godley and Lavoie (2007).…”

“…The dynamics of foreign debt and the interest rate on it will be introduced in section 4.4.4. when we present the balance of payments dynamics. Furthermore, we assume all export proceedings in dollars are sold to the Central Bank, which is the case in most countries and often mandatory (Dvoskin and Torchinsky Landau, 2023). Imports are also done by buying dollars from the Central Bank, such that only the public sector holds external assets and liabilities, with the government holding external debt and the central bank holding international reserves.…”

“…As discussed before, 𝐷 ̇= 𝐹, in which 𝐹 is the net financial inflows and represents the total result of the capital and financial accounts. 16 We build our net financial inflow function based on the literature that describes the behaviour of capital flows and their own determinants (Borio and Disyiatat, 2015;Rey, 2015;Dvoskin and Torchinsky Landau, 2023), while trying to keep it simple. Financial inflows depend on the interest rate differential (between domestic and international rates), on the country's domestic production (assuming larger economies receive more flows), and negatively on the risk assessment by the market (𝜖), assumed exogenous for matters of simplicity.…”

“…GDP is usually denominated in national currency, while external debt is usually denominated in foreign currency, what matters in terms of liquidity to service the debt would be the access to this foreign currency, not the GDP in national currency. This has led some contributions to consider the ratio of external debt (and international reserves) to exports as the relevant variable to look at debt dynamics (Morlin, 2022;Dvoskin and Torchinsky Landau, 2023). Dividing equations 26 and 27 by exports we:…”