New Insights from a Structural Economic Dynamic Approach to Balance of Payments Constrained Growth

Abstract

In this paper it is shown that once-for-all variations in the level of the exchange rate may play an important role in the sectoral composition of the economy and this fact has important implications in terms of a disaggregated version of the Thirlwall's law even if the argument of the quantitative unimportance of relative price movements holds. The growth rate of a country is then shown to be affected by once-for-all movements in the level of nominal exchange rates and the concept of a natural exchange rate is introduced.

The role of intermediate inputs in a multisectoral balance-of-payments-constrained growth model: the case of Mexico

“…One of the striking aspects of this arrangement is that the exports of final goods require massive imports of intermediate goods, giving rise to the question of whether such a strategy is harmful to growth under a BoP constraint. To address this question, a proper analytical framework is a disaggregated version of Thirlwall's law (Thirlwall 1979) such as the one advanced by Araujo and Lima (2007) due to its focus on the multisectoral assessment of the BPGC hypothesis. Notwithstanding the BPCG model has implicitly considered the role of the structure, it was not originally designed for analyzing the impacts of a strategy based on imports of intermediate goods insofar as it considers only the exports and imports of final goods (see Thirlwall 1979).…”

“…1 To assess a strategy based on imports of intermediate goods, we follow two contributions to the disaggregated view of the BPCG hypothesis. The first is the multisectoral Thirlwall's law-MSTL hereafter-advanced by Araujo and Lima (2007). According to that view, the export and import elasticities may be considered as an averaged mean of sectoral export and import elasticities, respectively, being the weight of each sectoral elasticity the share of each sector in trade.…”

“…A common thread of these two contributions, namely Blecker and Ibarra (2013) and Araujo and Lima (2007), is the acknowledgment that any strategy that affects the structure of the economy may have an impact on the growth performance. To go a step further in establishing connections between these approaches, we intend to extend the Blecker and Ibarra (2013) analysis by relaxing some of their hypothesis in accordance with the derivation of the MSTL.…”

“…Such derivation becomes essential insofar as, over the last 2 decades, the production pattern has shifted toward the split of production stages among several producers accompanied by increased trade in intermediaries. Here following the Araujo and Lima (2007) approach, we present a fully multisectoral version of the BPCG model in the presence of intermediate inputs. 3 The main result that accrues from this derivation is that the BPCG rate is lower in the presence of foreign content of exports.…”

“…The next one advances a derivation of an MSTL with intermediate inputs, and Sect. 3 presents the econometric and numerical simulation exercises comparing the original MSTL (Araujo and Lima 2007) and the one derived here. Section 4 concludes.…”