Wage-led or profit-led? An analysis of the growth strategies of economies under the regime of inflation targeting, a flexible exchange rate, capital mobility and external debt

In this paper, a post-keynesian macrodynamic model is presented in order to analyze the effects of capital account openness on the macroeconomic performance of developing economies. In particular, the exercise of comparative statics shows that an increase in external indebtedness may have beneficial effects on the economy in the short-term, since it induces an increase in the degree of capacity utilization and the growth rate of capital stock. The long-run dynamics, however, show that, under certain conditions, access to the international capital market can generate explosive trajectories for the economic system, especially in a context where monetary policy is conducted in an inflation-targeting regime. In addition, it shows that a reduction in the inflation target pursued by the Central Bank - in the context of capital account opening and foreign funding on the part of enterprises - can generate a permanent increase in the real rate of interest. An increase in the enterprise's own cost as a result of the economy's external indebtedness, contributing to greater external fragility, also occurs. Furthermore, we analyzed the consistency of the growth strategies of developed and developing economies. Overall, the results show the validity of Thirlwall's Law, in that the growth regime of economies ultimately depends on the restrictions imposed by the income elasticities of imports and exports.

Endogenous growth; External saving; Exchange rate regime; Wage-led; Profit-led