External imbalances and the balance of payments constraint: evidence on multi-sector Thirlwall’s Law for nine Eurozone countries (1992–2019)

This article examines Thirlwall’s Law (TL) for a sample of nine Eurozone countries from 1992 to 2019. TL posits that a country’s long-run growth rate is determined by the ratio of its income elasticities of demand for exports and imports. Utilizing product-level data from the United Nations Commodity Trade Statistics Database (COMTRADE), this study categorises data into five main sectors based on technological intensity and estimates export and import equations for each sector and country relying on the autoregressive distributed lag framework and its error correction representation to compute short-run elasticities. The estimation techniques employed are seemingly unrelated regressions for exports and three-stage least squares for imports. Our findings reveal significant variations in income elasticities across sectors and countries, with a pronounced correlation between higher elasticities and more technologically advanced sectors, particularly among central economies. The article concludes that TL is a robust predictor of actual growth rates and a valuable framework for understanding the impact of external imbalances on the economic performance of the Eurozone over the past decades.