European Journal of Economics and Economic Policies: Intervention

Foreign debt, distribution, inflation, and growth in an SFC model*

Pablo Gabriel Bortz *

Keywords: Stock-Flow Consistent models, exchange rate policy, income distribution, twin deficits, external debt


We present an open economy growth model, using Stock-Flow Consistent (SFC) methodology. Our contribution is to add the possibility of one country issuing debt denominated in another country's currency, as well as allowing its firms to borrow from foreign banks. We investigate the effects and interactions that these features have on trade and financial flows, income distribution, foreign debt, and fiscal and monetary policy. Our results point towards the dismissal of the ‘twin deficit’ view, and support an active management of the exchange rate, in light of contradictory effects of fixed and flexible exchange rate regimes, according to the circumstances.

Author Notes

This paper would not have been completed without the comments, help, and suggestions from Yannis Dafermos, Marc Lavoie, Servaas Storm, and Genaro Zezza, in alphabetical order. At various stages of this research, I have also benefited from the useful comments and suggestions of Fabián Amico, Amit Bhaduri, Eduardo Crespo, Adriana Diaz Arias, Amitava Dutt, Germán Feldman, Alejandro Fiorito, the late Wynne Godley, Ramanan V. Iyer, Alfred Kleinknecht, Gustavo Murga, Ro Naastepad, Maria Nikolaidi, Luis Rajuán, and Manuela Robba, as well as from two anonymous referees. Obviously, none of the persons mentioned above is to be held responsible for any mistakes made in this paper, which are entirely my responsibility. I am also grateful for the financial support of the Netherlands Organization for Scientific Research (NWO).

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