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Imposing a balance of payment constraint on the Kaldorian model of cumulative causation

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  • Arslan Razmi

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    (University of Massachusetts Amherst)

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    Abstract

    We combine two strands of Post Keynesian growth theory by imposing a balance of payments constraint on a Kaldorian cumulative causation model. The effects of external and internal shocks, and the degree to which cumulative causation comes into play depends on the exchange rate and capital account regimes. Exports act as the only exogenous drivers of growth only under a regime of fixed exchange rates and in the absence of relative price effects. Under flexible exchange rates, by contrast, it is internal demand that serves as the only exogenous driver of of growth. Moreover, regardless of the type of shock, the presence of cumulative causation does not boost growth, although it may render growth more sustainable. JEL Categories: E12, F43, F32, O40

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    Paper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2011-28.

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    Date of creation: Oct 2011
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    Handle: RePEc:ums:papers:2011-28

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    Keywords: Cumulative causation; balance of payments constraint; export-led growth; capital account openness; exchange rate regime.;

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    1. Thirlwall, Anthony P & Hussain, Mohammed Nureldin, 1982. "The Balance of Payments Constraint, Capital Flows and Growth Rate Differences between Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 498-510, November.
    2. Robert A. Blecker, 2009. "Long-Run Growth in Open Economies: Export-Led Cumulative Causation or a Balance-of-Payments Constraint?," Working Papers 2009-23, American University, Department of Economics.
    3. Anthony Philip Thirlwall, 1979. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 32(128), pages 45-53.
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