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The twin deficit theory in a dynamic consistent stock-flow model for an open economy

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  • André Mellini
  • Guilherme Jonas Costa da Silva

Abstract

This paper aims to incorporate explicitly the twin deficits theory in a stock-flowconsistent model to analyze the impact of fiscal policy and public debt dynamics in a post-Keynesian model, investigating the effects and limitations. Even rejecting many neoclassicalhypotheses, fiscal policy has limitation to stimulate permanently economic growth becauseif it’s incompatible with balance of payment equilibrium, net external debt would rise andbecome unsustainable. Finally, this hypothesis is tested empirically and it is verified that thedynamics of the fiscal policy and external position are associated when specified accordingto Godley and Cripps (1983) and modified by Pérez Caldentey (2007). JEL Classification: E12; E62; F41; F43.

Suggested Citation

  • André Mellini & Guilherme Jonas Costa da Silva, 2022. "The twin deficit theory in a dynamic consistent stock-flow model for an open economy," Brazilian Journal of Political Economy, Center of Political Economy, vol. 42(3), pages 761-784.
    • Handle: RePEc:ekm:repojs:v:42:y:2022:i:3:p:761-784:id:2349
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    File URL: https://centrodeeconomiapolitica.org.br/repojs/index.php/journal/article/view/2349/2293
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    Keywords

    Stock-flow consistent; fiscal policy; external constraint; twin deficits; post- Keynesianism;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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