Financial integration, productive development and fiscal policy space in developing countries

Botta Alberto, Gabriel Porcile, Danilo Spinola, Giuliano Yajima

    Research output: Contribution to journalArticlepeer-review

    4 Citations (SciVal)

    Abstract

    This paper offers a simple, tractable post-Keynesian model, which highlights the importance of structural change and productive development in defining the dynamics of the Real Exchange Rate (RER) and foreign debt in a small open developing economy. The argument is that in countries that keep the capital account open and rely on austerity policies to induce a notional surplus in the Balance of Payment, the RER can hardly be used as a tool aimed at smoothing the impacts of changes in international financial markets (as argued in the classical macroeconomic trilemma). In our model, capital flows and fluctuations in the RER endogenously feed back into each other and give rise to medium-term cyclical macroeconomic volatility. Fiscal austerity, supposedly taming external imbalances, exacerbates such instability. More diversified productive structures and stronger non-price competitiveness open more space for expansionary fiscal policies, make the economy more resilient to finance-led macroeconomic cycles and make external debt more sustainable. Capital controls, together with stronger price sensitivity of net exports, can further stabilize the economy. The paper carries important policy implications, in particular for the combination of industrial and macroprudential policies in peripheral economies, whose pattern of specialization is highly dependent on a few low-tech commodities. The adoption of industrial policies to foster non-price competitiveness and diversification is critical to sustaining macroeconomic stability, both in the short and the long run.
    Original languageEnglish
    Pages (from-to)175-188
    Number of pages14
    JournalStructural Change and Economic Dynamics
    Volume66
    DOIs
    Publication statusPublished (VoR) - 29 Apr 2023

    Keywords

    • Structural change
    • Capital inflows
    • Macroprudential policies

    Fingerprint

    Dive into the research topics of 'Financial integration, productive development and fiscal policy space in developing countries'. Together they form a unique fingerprint.

    Cite this