A disequilibrium model of real and financial accumulation in an open economy. Theory, evidence, and policy simulations
The authors discuss in this well-written book the fourth version of a continuous model considering stock-flow behaviour in an open economy in which both price and quantity adjustment take place. Stocks are introduced with reference to the real sector where adjustments of fixed capital and inventories to their respective desired levels are present and to the financial sector which includes the stock of money, the stock of commercial credit, the stock of net foreign assets and the stock of international reserves. Real and financial feedbacks are, therefore, largely considered in the model. Government expenditure and revenues (taxation) are also present so that the effects of endogenous public deficits are included. Quantity behaviour equations are considered for the traditional macroeconomic variables in real terms. Expectations are present through an adaptive mechanism concerning expected output. A price block is included, which determines the domestic price level, the nominal wage rate, and the export price level. Endogenous determination of the last is considered crucial for an export-led economy, while wage- prices spiral effects are explicitly taken into account. The specification of the financial sector is completed by the inclusion of an interest-rate determination equation. Although the model is a closely interlocked system of simultaneous differential equations, the following causal links may be singled out. The growth process is both export-led and expectations-led. Given foreign demand and prices, real exports grow according to domestic competitiveness and to supply constraints. Export growth enhances output growth which in turn modifies expectations and, consequently, real capital formation. Output growth also influences real imports, aggregate public consumption, direct taxes and the level of private consumption through the determination of disposable income. Changes in inventories, whose desired level is linked to expected output, act as a buffer in output determination. The performance of real aggregates is also deeply influenced by price behaviour based on cost push and monetary mechanisms. Prices also enter in the determination of financial variables whose behaviour is closely connected with that of real variables. A central place in the model is occupied by credit whose expansion, as determined by the behaviour of banks, influences real capital accumulation as well as exports of goods and services and capital movements. An important role is also played by the rate of interest, for it influences the demand for money (and hence real consumption), credit expansion, and the accumulation of net foreign assets. The rate of interest is determined both by the foreign rate of interest and - given the demand for money - by the supply of money whose expansion is governed by the monetary authorities on the basis of their own policy targets and of the other cannels of money creation (represented by the government and the balance of payment. In sum, the model stresses real and financial accumulation in an advance open economy in which aggregate demand and supply (and expectations) on the one hand and liquidity (i.e. money and credit availability) on the other play crucial roles.
scientific article; zbMATH DE number 3902352