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Sustaining Imbalance: International Financial Foundations of Growth Models

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  • Braun, Benjamin
  • Baccaro, Lucio
  • Cova, Joshua

Abstract

Current account imbalances, which have surged again in recent years, are key drivers of global economic instability and conflict. Political economy explanations tend to focus on wage restraint and currency undervaluation. However, in a world of unrestricted cross-border capital mobility, the binding constraint for sustaining imbalances over time is financial flows. To address this gap, we develop a theoretical framework linking current account imbalances, growth models, and domestic financialization. We hypothesize that deep and liquid financial markets enable the reproduction of consumption-led growth by relaxing the current account constraint, while financial underdevelopment favors export-led growth by incentivizing capital exports. We test our theoretical propositions with a series of error correction models and an event history analysis, based on panel data on 55 countries over the period 1970-2022. We find broad support for the theoretical expectations but a dissimilarity in the relationship between growth models and financialization: While financial development is crucial for the long-term maintenance of consumption-led growth in advanced economies especially, results are inconclusive regarding the role of financial underdevelopment as a facilitating factor for export-led growth.

Suggested Citation

  • Braun, Benjamin & Baccaro, Lucio & Cova, Joshua, 2026. "Sustaining Imbalance: International Financial Foundations of Growth Models," SocArXiv q7p2e_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:q7p2e_v1
    DOI: 10.31235/osf.io/q7p2e_v1
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    References listed on IDEAS

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