Correctly Analyzing the Balance of Payments Constraint on Growth
AbstractThe BPCG model provides an interesting hypothesis regarding economic growth. The main implication is that world demand places a constraint on individual country performance. I discuss this implication and argue that tests of the BPCG model have essentially been tests of the hypothesis that trade is balanced over the long run; a plausible hypothesis but one that need not hold mainly due to demand-side constraints. I then discuss the role of relative prices and investment, point out logical inadequacies in the traditional BPCG framework, and suggest an alternative theoretical framework to investigate its robustness. Our theoretical and empirical explorations contribute to reconciling evidence supporting the BPCG hypothesis with recent work that consistently ?nds an important role for the level of the real exchange rate and investment, independently of world demand growth.
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Bibliographic InfoPaper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2013-12.
Date of creation: 2013
Date of revision:
Balance of payments-constrained growth model; accumulation; demand-led growth; real exchange rates; terms of trade.;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
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