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

  • Lanzafame, Matteo

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 ARDL modelling, mean-group and pooled mean-group estimation methods, we use annual data over the 1960-2010 years 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 (yb) must equal the natural (or potential) rate of growth (yn) 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 yb and yn. The results indicate the existence of unidirectional long-run causality from yb to yn , thus reinforcing the view, embodied in the ‘Law’, that long-run growth is demand-determined and constrained by the BOP.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33130.

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Date of creation: Sep 2011
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Handle: RePEc:pra:mprapa:33130
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  1. Norman Loayza & Romain Ranciere, 2002. "Financial Development, Financial Fragility, and Growth," CESifo Working Paper Series 684, CESifo Group Munich.
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  15. Matteo Lanzafame, 2006. "The Endogeneity of the Natural Rate of Growth in the Regions of Italy," Studies in Economics 0606, School of Economics, University of Kent.
  16. Hartwig, Jochen, 2010. "Is health capital formation good for long-term economic growth? - Panel Granger-causality evidence for OECD countries," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 314-325, March.
  17. Lena Vogel, 2009. "The endogeneity of the natural rate of growth - an empirical study for Latin-American countries," International Review of Applied Economics, Taylor & Francis Journals, vol. 23(1), pages 41-53.
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  27. repec:oup:restud:v:58:y:1991:i:2:p:277-97 is not listed on IDEAS
  28. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November.
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