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Capital Flows, Interest Payments and the Balance-of-Payments Constrained Growth Model: A Theoretical and Empirical Analysis

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  • Juan Carlos Moreno-Brid

Abstract

The analytical framework known as the balance-of-payments constrained growth model introduced by Anthony P. Thirlwall more than two decades ago, and further developed by him and N. Hussain, was a major contribution to understanding the relevance of a foreign exchange constraint on the long-run growth performance of open economies. In its simplest expression this model is known as Thirlwall's law. Recent contributions have revised this analytical model in order to ensure that the pattern of foreign debt accumulation, implicit in the economy's balance-of-payments constrained growth path, is sustainable. Up to now most theoretical presentations of Thirlwall's law do not incorporate interest payments explicitly and, moreover, the empirical studies carried out within this tradition do not take them into account. This omission may be a major shortcoming in the analysis of the long-term growth path of economies-like many developing ones-whose net interest payments abroad are a large debit item in the current account of their balance of payments. In the present paper we introduce an extension of the balance-of-payments constrained growth model that explicitly captures the influence on foreign interest payments of the economy's long-run rate of growth-while at the same time guaranteeing that foreign indebtedness is not on an explosive track-and test its empirical adequacy by applying it to examine the Mexican case. Copyright Blackwell Publishing Ltd 2003.

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  • 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, May.
  • Handle: RePEc:bla:metroe:v:54:y:2003:i:2-3:p:346-365
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