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

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  • Lanzafame, Matteo

Abstract

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
Handle: RePEc:pra:mprapa:33130
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Keywords: Balance of payments; endogenous growth; panel cointegration; pooled mean-group estimation; panel Granger-causality;

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Find related papers by JEL classification:
  • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
  • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
  • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
  • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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Cited by:

  1. Arus Tunian, 2015. "Current Account Deficit And Economic Growth In Armenia," Studies and Scientific Researches. Economics Edition, "Vasile Alecsandri" University of Bacau, Faculty of Economic Sciences, issue 21.
  2. Ana Lourdes Morones Carrillo, 2016. "Crecimiento económico en México: restricción por la balanza de pagos," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(1), pages 39-58, May.
  3. Felipe, Jesus & Lanzafame, Matteo & Zhuang, Juzhong, 2014. "The People’s Republic of China's Potential Growth Rate: The Long-Run Constraints," ADB Economics Working Paper Series 418, Asian Development Bank.
  4. Juzhong Zhuang & Matteo Lanzafame & Jesus Felipe, 2015. "The People’s Republic of China's Potential Growth Rate: The Long-Run Constraints," Working Papers id:6656, eSocialSciences.
  5. Leon Podkaminer, 2017. "“Thirlwall’s Law” reconsidered," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(1), pages 29-57, February.

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