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International Liquidity and Growth in Brazil

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Abstract

This paper analyzes the relation between international liquidity and growth for Brazil in 1966-2000. Defining the former as the ratio of foreign reserves to foreign (interest-bearing) debt, the objective is to build a model connecting growth with international liquidity, and then check whether the results from such a model hold up in practice. The model builds upon Thirlwall's (1979) law and uses some basic accounting identities to specify a liquidity constraint on small open economies. The main implication of such a model is that, similar to what happens with liquidity constrained agents in closed economies, small open economies tend to adjust their current account, especially their trade balance, to the availability of external finance. Thus, in face of fluctuations in international liquidity, one should expect fluctuations in growth after a time lag. This is exactly what the paper verifies for Brazil in 1966-2000, that is, changes in Brazil's international liquidity tends to lead changes in its growth rate. Overall, inertia and international liquidity explains approximately 40% of the variation in Brazil's growth rate in 1966-2000.

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Paper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. with number 2001-04.

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Length: 25 pages
Date of creation: Nov 2001
Date of revision:
Handle: RePEc:epa:cepawp:2001-04

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Keywords: international liquidity; liquidity constraint; growth; Brazil;

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References

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  1. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
  2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  3. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
  4. Roberto Chang & Andres Velasco, 1999. "Liquidity crises in emerging markets: Theory and policy," Working Paper 99-15, Federal Reserve Bank of Atlanta.
  5. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
  6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
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Cited by:
  1. Ricardo Adrogué & Martin Cerisola & Gaston Gelos, 2006. "Brazil's Long-Term Growth Performance," IMF Working Papers 06/282, International Monetary Fund.
  2. Nelson H. Barbosa-Filho, 2001. "The balance-of-payments constraint:from balanced trade to sustainable debt," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 381-400.
  3. Nelson Henrique Barbosa Filho, 2003. "Growth, Exchange Rates and Trade in Brazil: a Structuralist Post Keynesian Approach," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] c42, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  4. Nelson H. Barbosa Filho, 2002. "The Balance-of-payments Constraint: From Balanced Trade to Sustainable Debt," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2001-06, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  5. Nelson H. Barbosa-Filho, 2001. "The balance-of-payments constraint:from balanced trade to sustainable debt," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 381-400.

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