Growth rates constrained by internal and external imbalances: a demand orientated approach
Thirlwall’s Law considers that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. The Law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. The aim of this paper is to fill this gap by developing a growth model in line with Thirlwall’s Law that takes into account both internal and external imbalances. The model is tested for Portugal that recently fell into a public debt crisis with serious negative consequences on growth. The empirical analysis shows that the growth rate in Portugal is in fact balance-of-payments constrained and the main drawback is the high import elasticity of the components of demand and in particular that of exports.
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- Micaela Antunes & Elias Soukiazis, 2009.
"How well the balance-of- payments constraint approach explains the Portuguese growth performance: empirical evidence for the 1965-2008 period,"
GEMF Working Papers
2009-13, GEMF, Faculty of Economics, University of Coimbra.
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