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The Effects of Internal and External Imbalances on Italy´s Economic Growth. A Balance of Payments Approach with Relative Prices No Neutral

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Author Info

  • Elias Soukiazis

    ()
    (Faculty of Economics, University of Coimbra and GEMF, Portugal)

  • Pedre André Cerqueira

    ()
    (Faculty of Economics, University of Coimbra and GEMF, Portugal)

  • Micaela Antunes

    (Department of Economics, Business and Industrial Engineering, University of Aveiro and GEMF, Portugal)

Abstract

Recently, Soukiazis E., Cerqueira P., and Antunes M. (2013) developed a model – hereafter the SCA model - that takes into account both internal and external imbalances and where relative prices are not neutral in the pace economic growth. The SCA model can be considered as an extension of the well known Thirlwall´s Law (Thirlwall, 1979) stating that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. However, Thirlwall´s 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 in the peripheral countries 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 implement the more complete SCA model in Italy and check its accuracy for explaining the growth path in this country. Our empirical analysis shows mainly that Italy grew less than its potential capacity due to supply constraints. A scenarios analysis shows that improving external trade performance is the most effective way to achieve higher growth in Italy.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2013-14.

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Length: 30 pages
Date of creation: Apr 2013
Date of revision:
Publication status: Published in Economic Modelling 40: 334-341, 2014.
Handle: RePEc:gmf:wpaper:2013-14.

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Keywords: Internal and external imbalances; price and income elasticities of external trade; equilibrium growth rates; 3SLS system regressions; supply constraints.;

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References

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  1. Julio López G. & Alberto Cruz B., 2000. ""Thirlwall's Law" and beyond: The Latin American Experience," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(3), pages 477-495, April.
  2. 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.
  3. 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.
  4. Robert A. Blecker, 2009. "Long-Run Growth in Open Economies: Export-Led Cumulative Causation or a Balance-of-Payments Constraint?," Working Papers, American University, Department of Economics 2009-23, American University, Department of Economics.
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