Abstract
AbstractThis research is aimed at investigating the causes of volatility that affect middle‐income countries by studying the La Marca model. Drawing from the open‐economy Goodwin tradition, this model demonstrates that economic activity, income distribution and accumulation of foreign assets dynamically interact, resulting in a pattern of dampened cycles. The study consists in analyzing the characteristics of the model by initially imposing: (I) a constant real exchange rate; (II) a constant net external asset to capital ratio, which is in line with the balance of payments dominance theory and (III) a fixed income distribution. We then (IV) expand the original model by adding an evolutionary supply‐side in which productivity is at the center of the economic dynamic through international technology transfer and the Kaldor‐Verdoorn effect. The results show that (1) the model always converges. (2) The restrictions (I) and (II) remove the cyclical component of the model, which highlights a central difference between La Marca and the original Goodwin model. (3) Fixed income distribution leads to a monotonic trajectory that reduces oscillations. (4) The inclusion of productivity dynamics generates new sources of volatility in the relationship between productivity, capacity utilization and net external assets and is in line with the structuralist argument of structural fragility.
Highlights
The recurrence of a boom and bust dynamic in key economic variables, such as GDP growth, is a persistent problem for many economies, especially developing countries (Koren & Tenreyro, 2007)
As our objective is to study Latin American economies, we apply to this model some adjustments and expansions
The results show that the cyclical dynamics hold with the two assumptions of the Balance of Payments Constrained Model (BPCM), which opens the discussion about the real need of accepting these two strong assumptions to explain the cyclical economic adjustment in developing countries
Summary
The recurrence of a boom and bust dynamic in key economic variables, such as GDP growth, is a persistent problem for many economies, especially developing countries (Koren & Tenreyro, 2007). This volatility has strong impacts in the economic structures, raising uncertainty, fostering productive specialization, and increasing the fragility of the economic system (Lavopa & Szirmai, 2014). Stylized facts show that economic volatility has an important regular component, in which the literature explains using (I) concept of growth episodes (Szirmai, 2008) and (II) cycle theories (Korotayev & Tsirel, 2010). We observe the repetition of short periods of growth succeeded by strong crisis and followed by adjustment periods that weaken the structure of the economy (Foster-McGregor et al, 2015)
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