Essays on Open Economy Macroeconomics

The final dissertation consists of four chapters, of which the provisional titles and abstracts are provided in the subsections below. 1 Inflation and Distributive Conflict The chapter reviews conflict inflation models, contrasting alternative theoretical perspectives underlying conflicting claims models. Conflicting claims models have stressed the race between prices and money wages, in the struggle among capitalists and workers as the main inflationary pressure. We discuss how conflicting-claims inflation models describe conflict inflation and the related outcome for income distribution. The chapter also explores criticism to the New-Keynesian Phillips curve. The relation between inflation and endogenous money theory is also presented. A deeper understanding of distributive conflict requires an analytical exposition of the relation between prices and distribution. In general, conflicting claims models rely on Kaleckian explanation of distribution, based on the notion of mark-up pricing according to the degree of monopoly. Conflict inflation allows wage bargaining to affect income distribution and, thus, the real mark-up level. However, this theory contains unsolved theoretical shortcomings, lacking an ultimate explanation for profits and overlooking input-output relations. An alternative theory of distribution can be found in modern appraisals of the Classical surplus approach. This approach has been extended to the study of inflation, providing a consistent relation between inflation and distributive conflict. 2 Inflation and conflicting claims in the open economy The evolution of prices and income distribution in open economies cannot be studied independently from international prices and exchange rates, especially in small open economies. Exchange rates and international prices are fundamental to explaining inflation in open economies. Conflict inflation models account for these variables by including imported inputs and, in some cases, a distributive impact of exchange rates. A different viewpoint emerges from the Classical-Keynesian distribution theory for a price-taker open economy. Thus, we explore this alternative by developing a conflict inflation model building on the Classical-Keynesian approach. The paper contributes to the literature by combining the conflicting claims approach with the Classical-Keynesian open economy framework. Including tradable prices, the model considers their direct impact on distribution. Therefore, it addresses a cause of inflation overlooked in the literature. Finally, conflict inflation affects the real exchange rate, which becomes an important distributive variable. 3 International inflation and trade linkages in Brazil under inflation targeting The chapter assesses the connection between global inflation and domestic inflation for the case of Brazil during the period 1999-2020 through a VAR model. The estimate includes the variables usually considered as relevant determinants of inflation. Additionally, it is included an index that combines the producer price index of Brazilian trade partners, weighted by the yearly average share of each country in Brazilian imports of Intermediate and Capital goods. The Foreign PPI index shows a positive effect on the Brazilian Consumer Price Index, consisting of a relevant explanation for domestic inflation in Brazil during the period 1999-2020. Impulse Response functions show that the Effective Exchange Rate is the main determinant of domestic CPI in Brazil. The importance of international prices and the exchange rate has fundamental implications for the operation of the inflation targeting regime. The results are in line with the literature’s empirical findings showing the overall relevance of international variables in the explanation of inflation. Further research may discuss the transmission channels of cross-border inflation as well as evaluate the implications of these results to inflation theory. 4 Growth and debt stability in a supermultiplier model with public expenditures and foreign trade The chapter extends the baseline Sraffian supermultiplier model for an open economy with the government, introducing two autonomous expenditures. The two sources of autonomous demand correspond to public expenditures and exports. We also analyze the stability conditions for public debt and foreign debt ratios. Public debt stability requires that the interest rate on public debt is smaller than the output growth rate, as in Domar (1944). Foreign debt is evaluated in proportion to exports, accounting for the availability of foreign currency required to service external liabilities. The foreign debt-to exports ratio converges to a stable value when the international interest rate is smaller than the growth rate of exports. However, this value may not be compatible with the availability of international capital flows. We examine the consequences of a constraint to foreign debt ratio, in line with Bhering et al. (2019), reiterating the importance of a long-term external constraint to economic growth (Thirlwall, 1979). A fiscal policy rule is proposed to keep the foreign debt ratio below an upper limit for this ratio. We simulate five experiments showing the conditions for stability of debt ratios, the execution of the fiscal policy rule, and the alternative of a structural change policy. Altogether, the chapter provides stability conditions for growth in an open economy paying its international liabilities in foreign currency. Simulations show that the fiscal policy successfully reduces the equilibrium foreign debt-to exports ratio by decreasing the share of public expenditures in autonomous demand. Experiments also show that industrial policies that cause structural change and increase exports’ growth keep the foreign debt ratio below the threshold with a better performance in terms of growth than the fiscal policy rule.