Natural, effective and BOP-constrained rates of growth: Adjustment mechanisms and closure equations

Gabriel Porcile & Danilo Sartorello Spinola


The interaction between the effective (yE) and the natural rates of growth (yN) is a central part-implicitly or explicitly addressed-in all growth models. A stable equilibrium requires these two rates to converge; otherwise, one or more key macroeconomic variables would be rising or falling without bounds. In addition, the Keynesian tradition stressed the key role of the Balance-of-Payments constraint as a determinant of the equilibrium growth rate in the long run (yBP). This paper discusses alternative mechanisms through which these three growth rates converge and relates them to different theoretical approaches to the determinants of growth. With this objective, we extend the model suggested by Setterfield (2010) to include the evolution of the North-South technology gap and the pattern of specialisation as key components of the Kaldorian productivity regime. The importance of the National System of Innovation in shaping the learning parameters and outcomes of the model is stressed, drawing from the Schumpeterian literature. A successful development strategy may emerge when the NSI enhances indigenous technological capabilities that allow the South economy to catch-up with the technological frontier. Keywords: BOP-constrained growth models, Growth Models, Structural Change, Technological Capabilities

JEL Classification: E12, F43, O30