The twin deficit theory in a dynamic consistent stock-flow model for an open economy

ABSTRACT This paper aims to incorporate explicitly the twin deficits theory in a stock-flow consistent model to analyze the impact of fiscal policy and public debt dynamics in a post-Keynesian model, investigating the effects and limitations. Even rejecting many neoclassical hypotheses, fiscal policy has limitation to stimulate permanently economic growth because if it’s incompatible with balance of payment equilibrium, net external debt would rise and become unsustainable. Finally, this hypothesis is tested empirically and it is verified that the dynamics of the fiscal policy and external position are associated when specified according to Godley and Cripps (1983) and modified by Pérez Caldentey (2007).