To read the full version of this content please select one of the options below:

A reconciliation proposal of demand-driven growth models in open economies

Rafael Saulo Marques Ribeiro (Department of Land Economy, University of Cambridge, Cambridge, UK)
John S.L. McCombie (Department of Land Economy, University of Cambridge, Cambridge, UK)
Gilberto Tadeu Lima (Department of Economics, University of São Paulo, São Paulo, Brazil)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 8 May 2017

Abstract

Purpose

The purpose of this paper is to contribute to the literature on demand-driven Keynesian growth in open economies by developing a formal model that combines Dixon and Thirlwall’s (1975) export-led growth model and Thirlwall’s (1979) balance-of-payments constrained growth model into a more general specification. Then, based on the model developed in this paper, the authors analyse more broadly some important issues concerning the net impact of currency depreciation on the short-run growth.

Design/methodology/approach

The authors build upon Dixon and Thirlwall’s (1975) export-led growth model and Thirlwall’s (1979) balance-of-payments constrained growth model in order to develop the theoretical framework. The authors also run numerical simulations to illustrate the net impact of devaluation on the short-run growth rate in different scenarios.

Findings

The authors demonstrate that the net impact of currency devaluation on growth can go either way, depending on some structural conditions such as the average share of imported intermediate inputs in prime costs of domestic firms and the institutional capacity of trade unions to set nominal wages through the bargaining process. The model also shows that the effectiveness of a competitive real exchange rate to promote growth is higher in countries where the share of labour in domestic income is also higher.

Research limitations/implications

This paper provides a coherent formal starting-point for further theoretical developments on the interrelatedness between currency devaluation, income distribution and growth. These findings provide empirically testable hypothesis for future research.

Originality/value

The present study proposes an alternative formal solution for the theoretical problem of imposing a balance-of-payments constraint on the process of cumulative causation often incorporated in Kaldorian growth models. In terms of policy, the framework sheds further light on the relevance of income distribution and the labour market institutional framework for the dynamics of the exchange rate pass-through mechanism and allows us to map out related conditions under which currency devaluation can promote growth.

Keywords

Acknowledgements

The authors are grateful to Ricardo Araujo and Nigel Allington for their valuable comments and suggestions to an earlier version of this paper. The remaining errors are the authors’ own.

Citation

Ribeiro, R.S.M., McCombie, J.S.L. and Tadeu Lima, G. (2017), "A reconciliation proposal of demand-driven growth models in open economies", Journal of Economic Studies, Vol. 44 No. 2, pp. 226-244. https://doi.org/10.1108/JES-12-2015-0241

Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited