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External debt sustainability and policy rules in a small globalized economy

  • Porcile, Gabriel
  • de Souza, Alexandre Gomes
  • Viana, Ricardo

The paper develops a Post Keynesian macroeconomic model which discusses the conditions that lead to an external debt crisis in a small developing economy fully integrated to global goods and financial markets. The focus is on how policy rules affect the stability of the economy. Two kinds of policy rules are discussed, namely inflation target and real exchange rate target, implemented through an interest rate operation procedure (IROP). It is argued that in both cases the evolution of the real exchange rate should be closely monitored to avoid external instability. It is also suggested that a real exchange rate target may be more effective to stabilize the economy if there is a strong tendency towards the equality of the foreign and domestic real interest rates.

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Article provided by Elsevier in its journal Structural Change and Economic Dynamics.

Volume (Year): 22 (2011)
Issue (Month): 3 (September)
Pages: 269-276

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Handle: RePEc:eee:streco:v:22:y:2011:i:3:p:269-276
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  8. Arslan Razmi & Robert Blecker, 2005. "Developing Country Exports of Manufactures: Moving Up the Ladder to Escape the Fallacy of Composition?," UMASS Amherst Economics Working Papers 2005-02, University of Massachusetts Amherst, Department of Economics, revised May 2006.
  9. Gilberto Tadeu Lima & Antonio J. A. Meirelles, 2007. "Macrodynamics of debt regimes, financial instability and growth," Cambridge Journal of Economics, Oxford University Press, vol. 31(4), pages 563-580, July.
  10. Frenkel, Roberto & Ros, Jaime, 2006. "Unemployment and the real exchange rate in Latin America," World Development, Elsevier, vol. 34(4), pages 631-646, April.
  11. Robert A. Blecker, 1998. "International Competitiveness, Relative Wages, and the Balance-of-Payments Constraint," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 20(4), pages 495-526, July.
  12. Antonio J. A. Meirelles & Gilberto Tadeu Lima, 2004. "Debt, Financial Fragility And Economic Growth: A Post-Keynesian Macromodel," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 094, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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  15. Gilberto Tadeu Lima & Mark Setterfield, 2010. "Pricing Behaviour and the Cost-Push Channel of Monetary Policy," Review of Political Economy, Taylor & Francis Journals, vol. 22(1), pages 19-40.
  16. Eckhard Hein & Engelbert Stockhammer, 2007. "A Post-Keynesian macroeconomic policy mix as an alternative to the New Consensus approach," IMK Working Paper 10-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  17. Anthony Philip Thirlwall, 1979. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 32(128), pages 45-53.
  18. Gilberto Tadeu Lima & Mark Setterfield, 2007. "Inflation Targeting And Macroeconomic Stability In A Post Keynesian Economy," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 174, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  19. Mark Setterfield, 2006. "Is inflation targeting compatible with Post Keynesian economics?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(4), pages 653-671, July.
  20. 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.
  21. Robert A. Blecker, 2010. "Open economy models of distribution and growth," Working Papers 2010-03, American University, Department of Economics.
  22. Miguel A. LeÛn-Ledesma, 2002. "Accumulation, innovation and catching-up: an extended cumulative growth model," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 201-216, March.
  23. John T. Harvey, 2006. "Post Keynesian versus neoclassical explanations of exchange rate movements: a short look at the long run," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(2), pages 161-179, January.
  24. Paulo Gala, 2008. "Real exchange rate levels and economic development: theoretical analysis and econometric evidence," Cambridge Journal of Economics, Oxford University Press, vol. 32(2), pages 273-288, March.
  25. Juan Carlos Moreno-Brid, 1999. "On Capital Flows and the Balance-of-Payments-Constrained Growth Model," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 21(2), pages 283-298, January.
  26. Mario Cimoli & Gabriel Porcile, 2011. "Global growth and international cooperation: a structuralist perspective," Cambridge Journal of Economics, Oxford University Press, vol. 35(2), pages 383-400.
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