Income distribution and the balance-of-payments constraint: reconciling open-economy demand-led growth models*

What the paper says

Open-economy demand-led growth models have focused on two main subjects: the impacts of income distribution on international competition, highlighted by the Neo-Kaleckian tradition, and the balance of payments as a constraint to growth, highlighted by the Kaldor–Thirlwall tradition. The combination of both features in the same dynamic modeling framework presents compatibility issues. This paper develops a common framework to analyze and compare these different growth models, showing that the incompatibility between model closures stems from two underlying assumptions of the canonical Neo-Kaleckian open-economy model: (i) that exports follow the same growth rate as domestic capital accumulation and (ii) that countries may continuously accumulate foreign debt. Simply dropping the first assumption by taking exports to follow foreign and not domestic income leads the model’s closure to become that of the open-economy supermultiplier model, as in Nah and Lavoie (2017). Moreover, the inclusion of a maximum indebtedness level, dropping the second assumption, leads the model to a balance-of-payments-constrained growth rate of equilibrium. Under these new assumptions, the model still reaches the main results from both traditions while allowing for domestic autonomous-demand components to be introduced as relevant drivers of long-run growth.