A Macroeconomic Model for a Developing Economy with a Binding Foreign Exchange Constraint

This paper presents an aggregative open-economy macro model for a developing economy facing a binding foreign exchange constraint. The model is not in the neoclassical tradition; it instead uses a Keynes-Kalecki framework of analysis to incorporate the features of such economies. The author has interpreted the constraint in terms of the model and identified factors such as elasticity of demand for exports, level of autonomous demand, rigidity of the nominal wage rate, and fixity of the exchange rate as sources of the constraint. The implications of the foreign exchange constraint on the functioning of the economy, both in the short run and the long run, are analyzed and the effects of policy measures on output, employment and the tightness of the foreign exchange constraint are examined.