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A Post Keynesian Perspective on Twenty-First Century Economic Problems

Edited by Paul Davidson

This book explores key economic problems and new policies for the global economy of the 21st century. The contributors discuss to what extent past policy errors were due to the incompetence of policymakers, and highlight problems including: international payments imbalances and currency crises, volatile security markets, inflation, achieving full employment, income distribution and alleviating individuals and nations of poverty.
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Chapter 5: A new approach to test the balance of payments-constrained growth model, with reference to the Mexican economy

Juan Carlos Moreno Brid


Juan Carlos Moreno Brid* INTRODUCTION Within the post Keynesian tradition, external demand is considered to be the dominant constraint on the long-run rate of expansion of domestic activity in most open economies. This perspective has its origin in the seminal contributions of Anthony P. Thirlwall. Based on Harrod’s work on the foreign trade multiplier, he built a simple analytical model that, under the assumption that the current account deficit in the balance of payments cannot be indefinitely financed, shows that the long-run rate of economic growth is determined by the dynamism of exports and import demand (Thirlwall 1979). This analytical framework, referred to here as the BPCG model, was later revised to allow for the influence of foreign capital flows on long-term economic growth (Thirlwall and Hussain 1982). This second generation of the BPCG model, however, failed to ensure that the economy’s long-run rate of growth is accompanied by an accumulation of external debt that is not on an explosive track. To overcome this limitation, a third generation of BPCG models has recently been developed that captures potential effects of capital flows on long-run economic growth and, simultaneously, ensures a sustainable trajectory of external debt accumulation (McCombie and Thirlwall 1997; Moreno-Brid 1998–99). This new version establishes firmer theoretical foundations for the BPCG model and, at the same time, ratifies the main claims concerning the role of external demand as a binding constraint on long-run economic expansion. The analytical relevance of this third generation of...

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