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Growth rates constrained by internal and external imbalances: a demand orientated approach

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  • Elias Soukiazis

    () (Faculdade de Economia/GEMF, Universidade de Coimbra)

  • Pedro Cerqueira

    () (Faculdade de Economia/GEMF, Universidade de Coimbra)

  • Micaela Antunes

    (Faculdade de Economia/GEMF, Universidade de Coimbra)

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 that 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

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2011-12.

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Length: 31 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:gmf:wpaper:2011-12

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Keywords: internal and external imbalances; import elasticities of the components of demand; equilibrium growth rates; 3SLS system regressions.;

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  1. Anthony Philip Thirlwall, 1979. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 32(128), pages 45-53.
  2. Micaela Antunes & Elias Soukiazis, 2009. "How well the balance-of- payments constraint approach explains the Portuguese growth performance: empirical evidence for the 1965-2008 period," GEMF Working Papers 2009-13, GEMF - Faculdade de Economia, Universidade de Coimbra.
  3. 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.
  4. Nelson H. Barbosa Filho, 2002. "The Balance-of-payments Constraint: From Balanced Trade to Sustainable Debt," SCEPA Working Papers 2001-06, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  5. Penélope Pacheco López & A. P. Thirlwall, 2006. "Trade liberalization, the income elasticity of demand for imports, and growth in Latin America," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 29(1), pages 41-61, October.
  6. 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.
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