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Is the balance of payments constrained growth rate time-varying? Exchange rate over valuation, policy-induced recessions, deindustrialization, and long run growth

Author

Listed:
  • Mark Setterfield

    () (Department of Economics, New School for Social Research)

  • Selen Ozcelik

    () (Department of Economics, New School for Social Research)

Abstract

A long-held view among macroeconomists in the UK and US is that sustained currency over valuation – often the result of financial-sector dominance – weakens domestic macroeconomic performance and results in premature deindustrialization. Similar concerns have been expressed about persistent, policy-induced recessions. According to balance-of payments-constrained growth (BPCG) theory, meanwhile, the BPCG rate in a multi-sector economy varies directly with the share of manufacturing in total output. This chapter develops a simple model that combines these observations to show how a temporary but persistent shock to the nominal exchange rate and/or domestic demand can both affect the actual rate of growth in the short run (by moving it away from the long-run equilibrium BPCG rate), and alter the BPCG rate itself (by lowering the income elasticity of demand for exports as a result of induced premature deindustrialization). The result is a time-varying balance-of payments constrained growth (TV-BPCG) rate. Because actual growth and the TV-BPCG rate vary directly, the latter is also characterized as quasi path dependent.

Suggested Citation

  • Mark Setterfield & Selen Ozcelik, 2017. "Is the balance of payments constrained growth rate time-varying? Exchange rate over valuation, policy-induced recessions, deindustrialization, and long run growth," Working Papers 1726, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1726
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    References listed on IDEAS

    as
    1. A. P. Thirlwall, 1983. "A Plain Man’s Guide to Kaldor’s Growth Laws," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 5(3), pages 345-358, March.
    2. Christian Schoder, 2012. "Hysteresis In The Kaleckian Growth Model: A Bayesian Analysis For The Us Manufacturing Sector From 1984 To 2007," Metroeconomica, Wiley Blackwell, vol. 63(3), pages 542-568, July.
    3. Anthony P. Thirlwall, 2011. "Balance of payments constrained growth models: history and overview," PSL Quarterly Review, Economia civile, vol. 64(259), pages 307-351.
    4. Felipe, Jesus & Mehta, Aashish, 2016. "Deindustrialization? A global perspective," Economics Letters, Elsevier, vol. 149(C), pages 148-151.
    5. Arslan Razmi, 2011. "Exploring the robustness of the balance of payments-constrained growth idea in a multiple good framework," Cambridge Journal of Economics, Oxford University Press, vol. 35(3), pages 545-567.
    6. Ricardo Azevedo Araujo & Gilberto Tadeu Lima, 2007. "A structural economic dynamics approach to balance-of-payments-constrained growth," Cambridge Journal of Economics, Oxford University Press, vol. 31(5), pages 755-774, September.
    7. A. P. Thirlwall, 2013. "Economic Growth in an Open Developing Economy," Books, Edward Elgar Publishing, number 15208.
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    12. repec:eee:streco:v:42:y:2017:i:c:p:67-75 is not listed on IDEAS
    13. Nishi, Hiroshi, 2016. "A multi-sectoral balance-of-payments-constrained growth model with sectoral heterogeneity," Structural Change and Economic Dynamics, Elsevier, vol. 39(C), pages 31-45.
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    More about this item

    Keywords

    Exchange rate; policy-induced recession; deindustrialization; balance-ofpayments-constrained growth; path dependence;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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