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Modelling economic growth with internal and external imbalances: Empirical evidence from Portugal

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  • Soukiazis, Elias
  • Cerqueira, Pedro A.
  • Antunes, Micaela

Abstract

Thirlwall's Law considers that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. The Law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. The aim of this paper is to fill this gap by developing a growth model in line with Thirlwall's Law that takes into account both internal and external imbalances. The model is tested for Portugal which recently fell into a public debt crisis with serious negative consequences on growth. The empirical analysis shows that the growth rate in Portugal is in fact balance-of-payments constrained and the main drawback is the high import elasticity of the components of demand and in particular that of exports.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 2 ()
Pages: 478-486

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:478-486

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Internal and external imbalances; Import elasticities of the components of demand; Equilibrium growth rates; 3SLS system regressions;

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References

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  1. Thirlwall, Anthony P & Hussain, Mohammed Nureldin, 1982. "The Balance of Payments Constraint, Capital Flows and Growth Rate Differences between Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 498-510, November.
  2. Carlos Garcimartín & Luis Rivas & Pilar García Martínez, 2010. "On the Role of Relative Prices and Capital Flows in Balance-of-Payments Constrained Growth: the Experiences of Portugal and Spain in the Euro Area," Working Papers del Instituto Complutense de Estudios Internacionales 05-10, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
  3. Theodore Pelagidis & Evangelia Desli, 2004. "Deficits, growth, and the current slowdown: what role for fiscal policy?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 26(3), pages 461-469, April.
  4. Robert A. Blecker, 2009. "Long-Run Growth in Open Economies: Export-Led Cumulative Causation or a Balance-of-Payments Constraint?," Working Papers 2009-23, American University, Department of Economics.
  5. Juan Carlos Moreno-Brid, 2003. "Capital Flows, Interest Payments and the Balance-of-Payments Constrained Growth Model: A Theoretical and Empirical Analysis," Metroeconomica, Wiley Blackwell, vol. 54(2-3), pages 346-365, 05.
  6. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
  7. Micaela Antunes & Elias Soukiazis, 2011. "How well the balance-of- payments constraint approach explains the Portuguese growth performance. Empirical evidence for the 1965-2008 period," ERSA conference papers ersa10p125, European Regional Science Association.
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Citations

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Cited by:
  1. Elias Soukiazis & Pedro André Cerqueira & Micaela Antunes, 2013. "Growth rates constrained by internal and external imbalances and the role of relative prices: empirical evidence from Portugal," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 36(2), pages 275-298, January.
  2. Elias Soukiazis & Pedro Cerqueira & Micaela Antunes, 2012. "Causes of the Decline of Economic Growth in Italy and the Responsibility of EURO. A Balance-of-Payments Approach," GEMF Working Papers 2012-03, GEMF - Faculdade de Economia, Universidade de Coimbra.
  3. Sáez, Antonio José & Prieto, Faustino & Sarabia, José María, 2012. "A two-tail version of the PPS distribution with application to current account balance data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(21), pages 5160-5171.

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