Sectoral Balances and Aggregate Demand in Emerging Market Economies

What are the institutional sources of aggregate demand in emerging market economies (EMEs), and how are they related to output dynamics? Building on a structuralist and post-Keynesian framework, we use sectoral national accounts to examine the institutional sources of aggregate demand and their relationship with output in EMEs. Panel regressions are used to estimate the contemporaneous relationship between sectoral balances and output, while local projections are used to examine their dynamic relationship over the medium run. In doing so, we contribute to the post-Keynesian literature on demand regimes in EMEs and the growing literature on growth models in comparative political economy. We find that the external sector plays a prominent role in medium-run output dynamics, with improvements in the current account balance associated with persistent increases in output. Government net lending is negatively associated with output over the early horizons, consistent with an important role for fiscal demand. Finally, country-level results reveal substantial heterogeneity, suggesting that household and corporate borrowing can be important sources of domestic demand in some EMEs.