Nitin Nair MS

Date of Award

Spring 2023


Dimitri Papadimitriou, Ph.D.


Underdevelopment often is conceived as being reproduced domestically. This thesis emphasizes the international forces that enable the persistence of underdevelopment. The first part of this thesis lays out a liquidity approach to underdevelopment which suggests that failure to create capacity arises from the asymmetries of international financial relationships. The second part of this thesis investigates a specific financial asymmetry, the currency hierarchy. We point out that the uncovered interest rate parity and the divergence from it are necessary conditions for the emergence of the currency hierarchy. Using ratios from the balance sheet of the currency issuer, we propose a quantification of the currency hierarchy. A weak currency must resort to three mechanisms; changes in interest rates, exchange rates, and accumulation of international reserves to improve balance sheet structure. We employ these relationships to formulate two novel financial post-Keynesian behavioral equations; an international reserves function and a domestic interest rate function. These equations are simulated in a stock-flow consistent model. We simulate the transmission of international shocks and domestic fiscal expansion. The key findings are (1) the intensity of economic activity in the emerging economy is reliant on the level of economic activity (and policy) in the developed economy and (2) any attempts to stimulate the emerging economy through government spending benefit primarily the developed economy while harming the emerging economy’s private sector, assuming free capital and goods mobility. This in turn does not allow an income-effect (tax revenue) to reduce government debt in the emerging economy. Simulations show import controls to be a solution. We suggest the need for international cohesion between emerging economies to create a more conducive international financial and trade system, halting the reproduction of underdevelopment.

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Open Access

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