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The Effects of Internal and External Imbalances on Italy´s Economic Growth. A Balance of Payments Approach with Relative Prices No Neutral

Author

Listed:
  • Elias Soukiazis

    () (Faculty of Economics, University of Coimbra and GEMF, Portugal)

  • Pedre André Cerqueira

    () (Faculty of Economics, University of Coimbra and GEMF, Portugal)

  • Micaela Antunes

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

Abstract

Recently, Soukiazis E., Cerqueira P., and Antunes M. (2013) developed a model – hereafter the SCA model - that takes into account both internal and external imbalances and where relative prices are not neutral in the pace economic growth. The SCA model can be considered as an extension of the well known Thirlwall´s Law (Thirlwall, 1979) stating that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. However, Thirlwall´s 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 in the peripheral countries 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 implement the more complete SCA model in Italy and check its accuracy for explaining the growth path in this country. Our empirical analysis shows mainly that Italy grew less than its potential capacity due to supply constraints. A scenarios analysis shows that improving external trade performance is the most effective way to achieve higher growth in Italy.

Suggested Citation

  • Elias Soukiazis & Pedre André Cerqueira & Micaela Antunes, 2013. "The Effects of Internal and External Imbalances on Italy´s Economic Growth. A Balance of Payments Approach with Relative Prices No Neutral," GEMF Working Papers 2013-14, GEMF, Faculty of Economics, University of Coimbra.
  • Handle: RePEc:gmf:wpaper:2013-14.
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    References listed on IDEAS

    as
    1. Nelson H. Barbosa-Filho, 2001. "The balance-of-payments constraint:from balanced trade to sustainable debt," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 381-400.
    2. 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.
    3. Elias Soukiazis & Micaela Antunes, 2011. "Application of the balance-of-payments-constrained growth model to Portugal, 1965-2008," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 34(2), pages 353-380.
    4. Theodore Pelagidis & Evangelia Desli, 2004. "Deficits, growth, and the current slowdown: what role for fiscal policy?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 26(3), pages 461-469.
    5. 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.
    6. Julio López G. & Alberto Cruz B., 2000. "“Thirlwall’s Law” and Beyond: The Latin American Experience," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 22(3), pages 477-495, March.
    7. 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.
    8. Juan Carlos Moreno-Brid, 1999. "On Capital Flows and the Balance-of-Payments-Constrained Growth Model," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 21(2), pages 283-298, January.
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    More about this item

    Keywords

    Internal and external imbalances; price and income elasticities of external trade; equilibrium growth rates; 3SLS system regressions; supply constraints.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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