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Current Account Imbalances and Economic Growth: a two-country model with real-financial linkages

Author

Listed:
  • Laura Barbosa de Carvalho

    () (São Paulo School of Economics (EESP) at Fundação Getúlio Vargas (FGV))

Abstract

This paper builds a two-country stock-flow consistent model by com- bining a debt-led economy that emits the international reserve currency with an export-led economy. The model has two major implications. First, an initial trade deficit in the debt-led country leads to a perma- nent imbalance in the current account, even when the exchange rate is at parity. Second, different re-balancing mechanisms, namely a currency depreciation or the reduction of the propensity to import in the debt-led country, and the increase in the propensity to consume in the export-led country, are shown to reduce both countries’ rate of economic growth in the medium-run. The conclusion is that in order to combine higher global economic growth with the long-run stability of the system, deeper changes must take place.

Suggested Citation

  • Laura Barbosa de Carvalho, 2012. "Current Account Imbalances and Economic Growth: a two-country model with real-financial linkages," Working Papers 1203, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1203
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    File URL: http://www.economicpolicyresearch.org/econ/2012/NSSR_WP_032012.pdf
    File Function: First version, 2012
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    References listed on IDEAS

    as
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    3. Benjamin M. Friedman, 1978. "Crowding Out or Crowding In? Economic Consequences of Financing Government Deficits," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 593-641.
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    8. José Ocampo, 2007. "The Instability and Inequities of the Global Reserve System," International Journal of Political Economy, Taylor & Francis Journals, vol. 36(4), pages 71-96.
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    10. Thomas I. Palley, 2011. "Explaining Global Financial Imbalances: A Critique of the Saving Glut and Reserve Currency Hypotheses," IMK Working Paper 13-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
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    Cited by:

    1. Hein, Eckhard & Dodig, Nina, 2014. "Financialisation, distribution, growth and crises: Long-run tendencies," IPE Working Papers 35/2014, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

    More about this item

    Keywords

    Stock-flow consistency; two-country model; debt-led consumption; global imbalances; international reserves;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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