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Business cycles in a balance-of-payments constrained growth framework

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  • Garcimartin, Carlos
  • Kvedaras, Virmantas
  • Rivas, Luis

Abstract

The main goal of this work is to analyze the potential implications of the balance-of-payments constraint theory for business cycles. Although this theory is oriented towards long-run growth, it implicitly predicts the existence of cycles in any open economy. As we try to show, according to this theory, business cycles are generated by two factors: capital flows and trade shocks. Yet the standard model can overestimate cycles due to its specification of trade equations. In the paper we first develop the implications of the balance-of-payments constraint theory with regard to business cycles, then build an augmented model that can correct the potential over-estimation of cycles: Finally we use that model to analyze the sources of business cycles in Portugal and Spain and to show that the standard model does indeed overestimate cycles, at least in these two cases.

Suggested Citation

  • Garcimartin, Carlos & Kvedaras, Virmantas & Rivas, Luis, 2016. "Business cycles in a balance-of-payments constrained growth framework," Economic Modelling, Elsevier, vol. 57(C), pages 120-132.
  • Handle: RePEc:eee:ecmode:v:57:y:2016:i:c:p:120-132
    DOI: 10.1016/j.econmod.2016.04.013
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    Cited by:

    1. Marwil J. Dávila-Fernández & Serena Sordi, 2017. "Distributive cycles and endogenous technical change in a BoPC growth model," Department of Economics University of Siena 760, Department of Economics, University of Siena.
    2. repec:gei:jnlfer:v:2:y:2017:i:1:p:1-15 is not listed on IDEAS

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    Keywords

    External constraint; Growth; Business cycle;

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