Edited by Paul Davidson
Chapter 5: A new approach to test the balance of payments-constrained growth model, with reference to the Mexican economy
5. A new approach to test the balance of payments-constrained growth model, with reference to the Mexican economy 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...
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