Financial Flows in a Kaleckian Framework

Abstract

This thesis extends the Kaleckian model of growth and income distribution, to include the influence of international financial flows. The focus is set on developing countries who borrow in a foreign currency, either through the public sector or the private sector. After a literature review on the merits of Kaleckian models, this thesis performs an empirical analysis of the relation between functional income distribution and economic growth for a developing country, namely Argentina. The findings reject the view that a distributive change in favour of profits is a necessary requirement for sustained periods of high growth rates. It also notes a change in the behaviour of the balance of payments around the late 1970s/early 1980s, related to a process of financial deregulation and capital account openness. As a result, we develop a Stock-Flow Consistent (SFC) model to integrate public and private sector borrowing on foreign currencies, with Keynesian features regarding the determination of inflation, investment and asset allocation. Among the results obtained, we show that public borrowing does not crowd out private investment, quite to the contrary; that the “twin deficits” view of the IMF does not necessarily holds and that the causality relation runs from external deficits to public deficits; that policies that stimulate consumption and not savings have a positive impact on GDP even in an open economy context, and that in order to solve trade and current account imbalances relative price changes will not be sufficient as long as the economic structure remains unchanged. In the last part, we develop an open economy Kaleckian model of income distribution and growth, adding the impact of semi-autonomous international financial flows on income distribution and investment decisions, focusing on private sector behaviour. Our empirical testing of themodel highlights the dangers that a large build-up of foreign debt might have on the balance sheet of the private sector and in the overall performance of the economy.