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Thirlwall's law, external debt sustainability, and the balance-of-payments-constrained level and growth rates of output

Author

Listed:
  • Gustavo Bhering

    (Universidade Federal do Rio de Janeiro (UFRJ), Rio de Janeiro, Brazil)

  • Franklin Serrano

    (Universidade Federal do Rio de Janeiro (UFRJ), Rio de Janeiro, Brazil)

  • Fabio Freitas

    (Universidade Federal do Rio de Janeiro (UFRJ), Rio de Janeiro, Brazil)

Abstract

Thirlwall's law, given by the ratio of the rate of growth of exports to the income elasticity of imports is a key result of balance-of-payments-constrained long-run growth models with balanced trade. Some authors have extended the analysis to incorporate long-run net capital flows. We provide a critical evaluation of these efforts and propose an alternative approach to deal with long-run external debt sustainability, based on two key features. First, we treat the external debt-to-exports ratio as the relevant indicator for the analysis of external debt sustainability. Second, we include an external credit constraint in the form of a maximum acceptable level of this ratio. The main results that emerge are that sustainable long-run capital flows can positively affect the long-run level of output, but not the rate of growth compatible with the balance-of-payments constraint, as exports must ultimately tend to grow at the same rate as imports. Therefore, Thirlwall's law still holds.

Suggested Citation

  • Gustavo Bhering & Franklin Serrano & Fabio Freitas, 2019. "Thirlwall's law, external debt sustainability, and the balance-of-payments-constrained level and growth rates of output," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(4), pages 486-497, October.
    • Handle: RePEc:elg:rokejn:v:7:y:2019:i:4:p486-497
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    Citations

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    Cited by:

    1. Thomas H. W. Ziesemer, 2023. "Semi-endogenous growth in a non-Walrasian DSEM for Brazil: estimation and simulation of changes in foreign income, human capital, R&D, and terms of trade," Economic Change and Restructuring, Springer, vol. 56(2), pages 1147-1183, April.
    2. Pedrosa, Ítalo & Brochier, Lídia & Freitas, Fabio, 2023. "Debt hierarchy: Autonomous demand composition, growth and indebtedness in a Supermultiplier model," Economic Modelling, Elsevier, vol. 126(C).
    3. Juan Carlos Moreno-Brid & Lorenzo Nalin & Edgar Pérez-Medina, 2022. "External challenges to the economic expansion of emerging markets in the post-COVID 19 and post-COP26 era: A balance-of-payments constrained growth (BPCG) perspective," PSL Quarterly Review, Economia civile, vol. 75(303), pages 313-354.
    4. Marwil J. Dávila-Fernández & Serena Sordi, 2021. "Thirlwall's law: Binding-constraint or centre-of-gravity? A possible Kaleckian solution," Department of Economics University of Siena 853, Department of Economics, University of Siena.
    5. Morlin, Guilherme Spinato, 2022. "Growth led by government expenditure and exports: Public and external debt stability in a supermultiplier model," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 586-598.
    6. Musa Esuwa Shingil & Huseyin Ozdeser & Andisheh Saliminezhad, 2022. "Investigation of Balance of Payment Constrained Growth Model: The Impact of Export Growth, Capital Flows, and Real Effective Exchange Rate on Growth of the UK," SAGE Open, , vol. 12(2), pages 21582440221, May.
    7. Robert A. Blecker, 2022. "New advances and controversies in the framework of balance‐of‐payments‐constrained growth," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 429-467, April.
    8. Akeem Rahaman & Scott Mark Romeo Mahadeo, 2024. "Constructing country-specific debt sustainability indices for developing countries," Working Papers in Economics & Finance 2024-01, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    9. Dvoskin, Ariel & Torchinsky Landau, Matías, 2023. "Income distribution and economic cycles in an open-economy supermultiplier model," Structural Change and Economic Dynamics, Elsevier, vol. 64(C), pages 273-291.
    10. Cruz, Manuel Máximo & Gahn, Santiago José & Morlin, Guilherme Spinato, 2022. "State-owned and multinational enterprises partnership as an import substitution strategy: A narrative ARDL approach to the case of oil contracts in Argentina (1958–1962)," Structural Change and Economic Dynamics, Elsevier, vol. 63(C), pages 213-223.
    11. Ziesemer, Thomas, 2022. "Linking the BOPC growth model with foreign debt dynamics to the goods and labour markets," MERIT Working Papers 2022-029, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    12. Juan Carlos Moreno-Brid & Lorenzo Nalin & Edgar Perez-Medina, 2023. "Current External Challenges to the Economic Expansion of Emerging Markets," Working Papers Series inetwp201, Institute for New Economic Thinking.

    More about this item

    Keywords

    Thirlwall's law; debt sustainability; BoP constraint on growth; Harrod foreigntrade multiplier;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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