Financial integration, productive development and fiscal policy space in developing countries

This paper offers a simple, tractable post-Keynesian model, which highlights the importance of structural change and productive development in defining dynamics Real Exchange Rate (RER) foreign debt small open developing economy. The argument is that countries keep capital account rely on austerity policies to induce notional surplus Balance Payment, RER can hardly be used as tool aimed at smoothing impacts changes international financial markets (as argued classical macroeconomic trilemma). In our flows fluctuations endogenously feed back into each other give rise medium-term cyclical volatility. Fiscal austerity, supposedly taming external imbalances, exacerbates such instability. More diversified structures stronger non-price competitiveness more space for expansionary fiscal policies, make economy resilient finance-led cycles sustainable. Capital controls, together with price sensitivity net exports, further stabilize carries important policy implications, particular combination industrial macroprudential peripheral economies, whose pattern specialization highly dependent few low-tech commodities. adoption foster diversification critical sustaining stability, both short long run.