Income Distribution and Economic Cycles in a Balance-Of-Payments Constrained Sraffian Supermultiplier Model

DVOSKIN, ARIEL; TORCHINSKY LANDAU, MATÍAS

Conferencia; 34nd Annual EAEPE Conference 2022; 2022

Supermultiplier growth models show that higher autonomousspending leads to stronger economic growth, implying that greater governmentspending can boost economic activity (Freitasand Serrano, 2015). However, several authorshighlighted the limits of this strategy, arguing that increased spending mightlead to unsustainable debt accumulation patterns. This is particularlyimportant for small open economies, where growth requires imports that must bepaid with foreign currency, which can lead to growing external indebtedness (Thirlwall,1979; Nikiforos, 2018; Oreiro and Costa Santos, 2019).Webuild a structuralist supermultiplier model for a small open economy with twosources of autonomous demand, government expenditures and exports. We account forthe dynamics of external indebtedness (determined by economic activity), wagegrowth (related to wage resistance) and the exchange rate (determined by theCentral Bank but limited by international reserves constraints). We find that,in the long run, there is a limit for government spending: its growth ratecannot exceed that of exports without generating an external crisis. However,there is a strong role for public policy: there is nothing that automaticallyleads the economy to its maximum growth rate compatible with the externalconstraint to growth, and if government expenditures grow less than exports,the economy will not completely exploit its external space.Butthe main contribution of the paper is in the short-run analysis, where we find anadditional restriction, related to income distribution. Since higher wagesincrease consumption and economic activity, they also require more imports,potentially leading to unsustainable debt growth. Therefore, there is a maximumreal wage compatible with external equilibrium (Canitrot, 1983). If unions’demand wages are lower than the external equilibrium wage, the economy will bestable, but will also achieve unnecessarily low output and real wages. On thecontrary, if target wages exceed those compatible with external equilibrium,the economy displays economic cycles between capacity utilisation, incomedistribution and indebtedness, marked by permanent inflation. We show that, inthe short run, the government can optimize fiscal and monetary policies tomaximise output given the external space, but that in the long run, economicgrowth requires not only domestic spending but also increasing exports to besustainable.