Endogenous growth cycles and money in an open economy: A social accounting matrix approach

The goal of this dissertation is to develop an alternative model of growth and cycles in an open economy and to investigate various policies within its context. The basic approach to this classical growth and cycles (CGC) model is motivated by the idea that an alternative theory of effective demand has to be developed in a growth context and that all expenditures need to be related to finance.;The following are the fundamental features of the CGC model. First, the point of departure of the model is the budget restraint of each sector in which its finance requirements from other sectors are equal to the excess of planned expenditures over expected revenues. These ex ante sectoral budget restraints are integrated into an aggregate social accounting matrix so that all stocks and flows are consistent with each other.;Second, the formulation of the model in terms of the ex ante decision variables of different sectors implies the possibility of aggregate disequilibria since the plans and expectations of the different sectors may not mesh with actual outcomes in an uncertain world. Market disequilibria result from the discrepancy between ex ante plans and expectations and expost outcomes and generate cycles of different durations. The short-run cycle in the CGC model is the 3-5 year inventory cycle in which aggregate demand and supply in the goods market chase after one another and seek to reach equilibrium. Firms respond to excess demand by lowering inventory stocks and increasing investment in circulating capital which expands output via the Leontief input-output relationship. Over the medium run, they respond to imbalances between actual and normal capacity by increasing investment in fixed capital.;Third, the model follows the post-Keynesian literature in assuming that over the short run investment is independent of savings because bank credit fills the gap between planned investment and available savings. However, the injection of bank credit also leads to the pile-up of debt. The most basic cyclical and dynamic features of the model revolve around this interaction between excess demand, investment, and debt.;Theoretical simulations investigate the impact of budget deficits, net exports, and the twin deficits problem. The two demand injections produce short-run stimulating effects on investment and output. However, eventually the disciplining effects of debt accumulation, the fall in the social savings rate and normal capacity utilization over the medium run dampen the immediate expansionary effects. Finally, given international competitiveness, the twin deficits result is produced as an immediate short-run effect.;Broadly, one can conclude that the macropolicy results of the CGC model locate it somewhere in between the post-Keynesian and neoclassical approaches.