Monetary Policy and the Pasinetti Index: A Stock Flow Model for Latin American Economies

The Pasinetti index is an early example of the analysis of the effects of monetary policy on income distribution. In this paper, we examine how high interest rates pose significant challenges to the implementation of monetary policy in Latin American economies. We explore the factors contributing to the high costs of borrowing, highlighting a set of stylized facts related to the external financial constraints faced by these countries, including the increase in risk premium. To analyse the macroeconomic and distributional implications of these policies, we develop a stock-flow consistent (SFC) model based on Latin American stylized facts. We incorporate the close relationship between sovereign risk and sovereign premiums, the feedback loop between these two variables, and the role of currency mismatches in the private non-financial sector. Scenario analysis reveals that a tightening of international lending conditions leads to reduced GDP growth, while fuelling a continuous process of income redistribution and currency devaluation.