The balance-of-payments—constrained growth model: a north—south approach

Abstract

This paper develops a general extended version of the balance-of-payments -constrained growth model that takes into account three often ignored aspects of contemporary growth in open economies—namely, trade imbalances and the importance of net financial flows in the long run, relative price changes caused by idiosyncratic rules of adjustment in prices, and trade and payments interdependence among asymmetric regions. We first present partial solutions for both a northern and a southern region under the key assumption of an exogenous world income growth. We show how, under specific assumptions, the solutions reduce to Thirlwall's rule. After that, we lift the small economy assumption and allow full interdependence among regions and explore the implications, over the terms of trade and the rate of growth of both regions, of changes in the rate of growth of net financial transfers. Contingent on parameters values of each region, we found that an exogenous change in the rate of growth of financial transfers may generate either a mutually reinforcing growth regime or a conflicting growth regime.

Keywords:

• balance-of-payments constraint
• north-south
• Thirlwall's law