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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

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  • 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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    Cited by:

    1. Porcile, Gabriel & Spinola, Danilo & Yajima, Giuliano, 2021. "Patterns of Growth in Structuralist Models: The Role of PoliticalEconomy," CAFE Working Papers 12, Centre for Applied Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.

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    More about this item

    Keywords

    Exchange rate; policy-induced recession; deindustrialization; balance-ofpayments-constrained growth; path dependence;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • 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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