Portfolio capital in the external constraint on economic growth: the cases of Brazil and Mexico

The hypothesis of the external constraint on economic growth, articulated in Thirlwall’s law, was a watershed in the analysis of the determinants of such growth in open economies. Subsequent extensions expanded the analytical scope of the law by including capital inflows for the financing of a sustainable current account deficit and capturing foreign currency outflows for the payment of interest on external debt. In that regard, given the growing importance of portfolio capital in current account financing, the authors of the present article modify the law as presented by Moreno-Brid (2003) and focus on foreign currency outflows for the payment of interest and dividends on portfolio capital. The empirical validity of this modification is tested on the basis of the cases of Brazil and Mexico, using quarterly series.