Post-Keynesian Two-Gap Model Debunked: Borrowing Abroad Leads to Economic Decline
The Post-Keynesian Two-Gap Model is criticized for being inconsistent and not useful for analyzing a country's economic growth limits. By adjusting for this inconsistency, it becomes a simpler model with domestic savings and capital inflows as the main factors limiting growth. The model suggests that relying on borrowing from abroad can lead to sustainable foreign debt, but may not improve overall well-being. The researchers propose a new neoclassical growth model that could be applied to small, low-income countries with limited growth potential due to low savings and foreign exchange shortages.