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Franklin Serrano and Ricardo Summa

In this paper we evaluate critically the popular Mundell–Fleming model from the heterodox standpoint of the exogenous interest-rate approach. We criticize the assumptions of exogenous money supply, ‘perfect’ international capital markets and inelastic exchange-rate expectations. We show that in a more realistic framework none of the main results of the Mundell–Fleming model on the relative effectiveness of fiscal and monetary policies is valid, either in floating and fixed exchange-rate regimes. We conclude that, within certain very asymmetric bounds, the Central Bank has the power to determine the domestic interest rate exogenously even in open economy with free capital mobility and that there is no automatic market mechanism to ensure the automatic adjustment of the interest rate and exchange rate to sustainable levels.

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Franklin Serrano and Fabio Freitas

This paper aims to show that the Sraffian supermultiplier model provides an alternative closure for the heterodox analysis of economic growth. The new closure follows from the assumption of the existence of autonomous non-capacity-creating expenditures, which implies that the ratio of the average to the marginal propensity to save is an endogenous variable whose determination allows the marginal propensity to invest to determine the saving ratio without the need for changes in income distribution. Provided it is also assumed that capitalist competition leads to gradual changes in the marginal propensity to invest in order to adjust productive capacity to demand, the new closure (in contrast to the Cambridge and neo-Kaleckian closures) allows us to reconcile demand-led growth, exogenous distribution, and a tendency towards normal capacity utilization.

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Gustavo Bhering, Franklin Serrano and Fabio Freitas

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.