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Causes of the Decline of Economic Growth in Italy and the Responsibility of EURO. A Balance-of-Payments Approach

  • Elias Soukiazis

    ()

    (Faculty of Economics University of Coimbra and GEMF)

  • Pedro Cerqueira

    ()

    (Faculty of Economics University of Coimbra and GEMF)

  • Micaela Antunes

    ()

    (Department of Economics, Business and Industrial Engineering, University of Aveiro and GEMF)

Some countries of the Euro-zone have experienced a declining economic growth more pronounced in the last recent years, like Italy. The aim of this paper is to investigate the causes of the poor growth performance in Italy and the responsibility of the Euro for this crisis. The theoretical approach applied is based on the balance-of-payments constraint hypothesis (known as Thirlwall’s Law) adapted to include internal and external imbalances. Our empirical analysis shows that both the extended model and the original Thirlwall’s Law over-predict the actual growth in Italy suggesting that there are supply constraints that encumber the economy from growing faster. Another conclusion is that part of the decline in economic growth is explained by the loss of competiveness during the Euro period. A scenarios analysis shows that a budget deficit and public debt discipline aiming at achieving the goals of the Stability Pact are not significant stimulus for faster growth. On the other hand, reducing the import dependence of the components of demand, or reducing the import and increasing the export shares in the economy are the most effective policies for fostering growth in Italy.

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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2012-03.

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Length: 25 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:gmf:wpaper:2012-03
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  1. Charalambos Pattichis, 2001. "Trade, Growth, and Monetary Union," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 24(1), pages 125-147, October.
  2. Nelson H. Barbosa Filho, 2002. "The Balance-of-payments Constraint: From Balanced Trade to Sustainable Debt," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2001-06, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  3. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
  4. Julio López G. & Alberto Cruz B., 2000. ""Thirlwall's Law" and beyond: The Latin American Experience," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(3), pages 477-495, April.
  5. Carlos Garcimartín & Luis Rivas & Pilar García Martínez, 2010. "On the Role of Relative Prices and Capital Flows in Balance-of-Payments Constrained Growth: the Experiences of Portugal and Spain in the Euro Area," Working Papers del Instituto Complutense de Estudios Internacionales 05-10, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
  6. Robert A. Blecker, 2009. "Long-Run Growth in Open Economies: Export-Led Cumulative Causation or a Balance-of-Payments Constraint?," Working Papers 2009-23, American University, Department of Economics.
  7. Alberto Bagnai, 2010. "Structural changes, cointegration and the empirics of Thirlwall's law," Applied Economics, Taylor & Francis Journals, vol. 42(10), pages 1315-1329.
  8. Thirlwall, Anthony P & Hussain, Mohammed Nureldin, 1982. "The Balance of Payments Constraint, Capital Flows and Growth Rate Differences between Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 498-510, November.
  9. Soukiazis, Elias & Cerqueira, Pedro A. & Antunes, Micaela, 2012. "Modelling economic growth with internal and external imbalances: Empirical evidence from Portugal," Economic Modelling, Elsevier, vol. 29(2), pages 478-486.
  10. Theodore Pelagidis & Evangelia Desli, 2004. "Deficits, growth, and the current slowdown: what role for fiscal policy?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 26(3), pages 461-469, April.
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