Linking the BOPC growth model with foreign debt dynamics to the goods and labour markets: A BOP-IXSM-Okun model

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We link the BOPC growth model to the goods market, foreign debt dynamics
and Okun's law. A new condition for getting the Thirlwall effect of
world GDP growth on domestic growth is that investment and exports
should react less than savings and imports, all as a share of GDP, to an
increase in the domestic growth rate. If this condition holds, the
Thirlwall effect is present for stable and unstable debt/GDP dynamics
and for positive or negative reactions of the current account to
domestic growth. Okun's law translates the effect on the domestic GDP
growth rate to a change of the unemployment rate. In unstable models,
the change of world GDP growth may turn around the debt/GDP dynamics.
Estimations support the specification of the theoretical model and lead
to simulations of the Thirlwall effect and interest rate shocks on
output growth. In the presence of banks consortia, unstable debt
dynamics are the empirically relevant case for Brazil. A crisis can be
less likely according to a simple model of profit maximizing bank
consortia through a jump into a steady state for the debt/GDP ratio;
unstable, increasing debt/GDP processes cannot be ruled out and may lead
to crises unless the empirics of the stability conditions gets more
favourable and leads the country-bank model into a stable steady state.
Original languageEnglish
Publication statusPublished - 26 Sept 2022

Publication series

SeriesUNU-MERIT Working Papers

JEL classifications

  • f43 - Economic Growth of Open Economies
  • o11 - Macroeconomic Analyses of Economic Development
  • o41 - One, Two, and Multisector Growth Models


  • Balance-of-payments constrained growth
  • foreign debt dynamics

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