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The balance of payments-constrained growth rate and the natural rate of growth: new empirical evidence

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  • Matteo Lanzafame

Abstract

This paper implements a panel approach to investigate the empirical relevance of ‘Thirlwall’s law‘, which states that long-run growth must be consistent with balance of payments (BOP) equilibrium and is thus determined on the demand side. Building on autoregressive distributed lag modelling, mean-group and pooled mean-group estimation methods, we use annual data over the 1960–2010 period for a panel of 22 OECD countries and find significant support for the ‘law’. Next, we also explore empirically the hypothesis that the BOP-constrained growth rate (y B) must equal the natural (or potential) rate of growth (y N) and find that the data do not reject this hypothesis. Finally, we adopt a new approach, based on panel Granger causality methods, to explore the direction of causality between y B and y N. The results indicate the existence of unidirectional long-run causality from y B to y N, thus reinforcing the view, embodied in the law that long-run growth is determined by demand and constrained by the BOP.

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  • Matteo Lanzafame, 2014. "The balance of payments-constrained growth rate and the natural rate of growth: new empirical evidence," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 38(4), pages 817-838.
    • Handle: RePEc:oup:cambje:v:38:y:2014:i:4:p:817-838.
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    6. Dávila-Fernández, Marwil J. & Oreiro, José L. & Dávila Dávila, Mario W., 2018. "Endogenizing non-price competitiveness in a BoPC growth model with capital accumulation," Structural Change and Economic Dynamics, Elsevier, vol. 44(C), pages 77-87.
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    8. Marwil J. Dávila-Fernández, 2018. "Alternative Approaches to Technological Change when Growth is BoPC," Department of Economics University of Siena 795, Department of Economics, University of Siena.
    9. A.P. Thirlwall, 2018. "Una vita nell’economia," Moneta e Credito, Economia civile, vol. 71(283), pages 179-210.
    10. Kevin S. Nell & A.P. Thirlwall, 2017. "Perche' la produttivita' degli investimenti varia tra paesi? (Why does the productivity of investment vary across countries?)," Moneta e Credito, Economia civile, vol. 70(279), pages 197-231.
    11. Dávila-Fernández, Marwil J. & Sordi, Serena, 2019. "Path dependence, distributive cycles and export capacity in a BoPC growth model," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 258-272.
    12. Arus Tunian, 2015. "Current Account Deficit And Economic Growth In Armenia," Studies and Scientific Researches. Economics Edition, "Vasile Alecsandri" University of Bacau, Faculty of Economic Sciences, issue 21.
    13. Valeriy V. Mironov & Liudmila D. Konovalova, 2019. "Structural changes and economic growth in the world economy and Russia," Russian Journal of Economics, ARPHA Platform, vol. 5(1), pages 1-26, April.
    14. Robert A. Blecker, 2022. "New advances and controversies in the framework of balance‐of‐payments‐constrained growth," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 429-467, April.
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    16. Basil Oberholzer, 2023. "Green Growth and the Balance‐of‐payments Constraint," Development and Change, International Institute of Social Studies, vol. 54(4), pages 804-840, July.
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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