For a partially convertible currency: A critique to Arida and Bacha

The objective of this article is to present a non-linear dynamic model of capital accumulation and external debt in order to evaluate the recently thesis defended by Bresser and Nakano that an excessive external debt in emerging countries – which is the result of large current account deficits – can produce not only an increase in external fragility of these economies, but also an economic stagnation, i.e. a permanent reduction in the growth rates of potential output. For this purpose, we will develop a dynamic model in which (i) an increase in the ratio external debt/GDP will produce a less than proportional increase in the rate of investment, since a fraction of the external finance will be used for the acquisition of non-reproducible assets like stocks and land; (ii) the country risk-premium is endogenous, being proportional to external debt as a fraction of GDP. In this theoretical framework, we will be able to show the existence of two long-run equilibrium: an equilibrium with a low external debt and a high degree of capacity utilization, and another equilibrium with a high external debt and a low degree of capacity utilization. Moreover, we also show that – for a certain set of parameters values – the equilibrium with high external debt is stable and in the neighborhood of this position the degree of capacity utilization and the ratio of external debt to GDP will both show a time path characterized by damped fluctuations. JEL Classification: E11; E43.