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

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.

Keywords: Balance-of-payments constrained growth, foreign debt dynamics

JEL Classification: F43, O11, O41