Is the Balance of Payments Constrained Growth Rate Time-Varying? Exchange Rate Over Valuation, Policy-Induced Recessions, Deindustrialization, and Long Run Growth

The New School for Social Research, Working Paper 26/2017

24 Pages Posted: 28 Aug 2017

See all articles by Mark Setterfield

Mark Setterfield

New School for Social Research

Selen Ozcelik

The New School - Department of Economics

Date Written: August 25, 2017

Abstract

A long-held view among macroeconomists in the UK and US is that sustained currency over valuation – often the result of financial-sector dominance – weakens domestic macroeconomic performance and results in premature deindustrialization. Similar concerns have been expressed about persistent, policy-induced recessions. According to balance-of payments-constrained growth (BPCG) theory, meanwhile, the BPCG rate in a multi-sector economy varies directly with the share of manufacturing in total output. This chapter develops a simple model that combines these observations to show how a temporary but persistent shock to the nominal exchange rate and/or domestic demand can both affect the actual rate of growth in the short run (by moving it away from the long-run equilibrium BPCG rate), and alter the BPCG rate itself (by lowering the income elasticity of demand for exports as a result of induced premature deindustrialization). The result is a time-varying balance-of payments constrained growth (TV-BPCG) rate. Because actual growth and the TV-BPCG rate vary directly, the latter is also characterized as quasi path dependent.

Keywords: Exchange rate, policy-induced recession, deindustrialization, balance-ofpayments- constrained growth, path dependence

JEL Classification: E12, F43, O41

Suggested Citation

Setterfield, Mark and Ozcelik, Selen, Is the Balance of Payments Constrained Growth Rate Time-Varying? Exchange Rate Over Valuation, Policy-Induced Recessions, Deindustrialization, and Long Run Growth (August 25, 2017). The New School for Social Research, Working Paper 26/2017, Available at SSRN: https://ssrn.com/abstract=3026290 or http://dx.doi.org/10.2139/ssrn.3026290

Mark Setterfield (Contact Author)

New School for Social Research ( email )

6 East 16th Street
New York, NY 10003
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Selen Ozcelik

The New School - Department of Economics ( email )

Room 1116
6 East 16th Street
New York, NY 10003
United States

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