IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/33130.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Lanzafame, Matteo, 2011. "The balance of payments constrained growth rate and the natural rate of growth: new empirical evidence," MPRA Paper 33130, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:33130
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/33130/1/MPRA_paper_33130.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/33461/1/MPRA_paper_33461.pdf
    File Function: revised version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Loayza, Norman V. & Ranciere, Romain, 2006. "Financial Development, Financial Fragility, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 1051-1076, June.
    2. Thomas Palley, 2003. "Pitfalls in the Theory of Growth: An application to the balance of payments constrained growth model," Review of Political Economy, Taylor & Francis Journals, vol. 15(1), pages 75-84.
    3. Mark Dray & A. P. Thirlwall, 2011. "The endogeneity of the natural rate of growth for a selection of Asian countries," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 33(3), pages 451-468, April.
    4. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1989. "The Revenues-Expenditures Nexus: Evidence from Local Government Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 415-429, May.
    5. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
    6. 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.
    7. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    8. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
    9. Bruno, Giovanni S.F., 2005. "Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models," Economics Letters, Elsevier, vol. 87(3), pages 361-366, June.
    10. Kajal Lahiri, 2005. "Analysis of Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 1093-1095.
    11. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    12. Miguel A. LeÛn-Ledesma & A. P. Thirlwall, 2002. "The endogeneity of the natural rate of growth," Cambridge Journal of Economics, Oxford University Press, vol. 26(4), pages 441-459, July.
    13. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May.
    14. 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.
    15. Mark Setterfield (ed.), 2010. "Handbook of Alternative Theories of Economic Growth," Books, Edward Elgar Publishing, number 12814.
    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. Nair-Reichert, Usha & Weinhold, Diana, 2001. " Causality Tests for Cross-Country Panels: A New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-171, May.
    18. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
    19. Karlsson, Sune & Lothgren, Mickael, 2000. "On the power and interpretation of panel unit root tests," Economics Letters, Elsevier, vol. 66(3), pages 249-255, March.
    20. Anthony P. Thirlwall, 2011. "Balance of payments constrained growth models: history and overview," PSL Quarterly Review, Economia civile, vol. 64(259), pages 307-351.
    21. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-670, Special I.
    22. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
    23. Matteo Lanzafame, 2009. "Is Regional Growth in Italy Endogenous?," Regional Studies, Taylor & Francis Journals, vol. 43(8), pages 1001-1013.
    24. Gilberto A. Libânio, 2009. "Aggregate demand and the endogeneity of the natural rate of growth: evidence from Latin American economies," Cambridge Journal of Economics, Oxford University Press, vol. 33(5), pages 967-984, September.
    25. Matteo Lanzafame, 2010. "The endogeneity of the natural rate of growth in the regions of Italy," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(5), pages 533-552.
    26. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    27. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    28. Jose Antonio Alonso, 1999. "Growth and the external constraint: lessons from the Spanish case," Applied Economics, Taylor & Francis Journals, vol. 31(2), pages 245-253.
    29. Alberto Bagnai, 2010. "Structural changes, cointegration and the empirics of Thirlwall's law," Applied Economics, Taylor & Francis Journals, vol. 42(10), pages 1315-1329.
    30. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    31. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
    32. Martinez-Zarzoso, Inmaculada & Bengochea-Morancho, Aurelia, 2004. "Pooled mean group estimation of an environmental Kuznets curve for CO2," Economics Letters, Elsevier, vol. 82(1), pages 121-126, January.
    33. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. Marwil J. Dávila-Fernández & Serena Sordi, 2017. "Distributive cycles and endogenous technical change in a BoPC growth model," Department of Economics University of Siena 760, Department of Economics, University of Siena.
    3. Marwil J. Dávila-Fernández & Serena Sordi, 2018. "Path dependence, distributive cycles and export capacity in a BoPC growth model," Department of Economics University of Siena 785, Department of Economics, University of Siena.
    4. repec:gei:jnlfer:v:2:y:2017:i:1:p:1-15 is not listed on IDEAS
    5. repec:psl:moneta:2017:31 is not listed on IDEAS
    6. 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.
    7. 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.
    8. repec:eee:streco:v:44:y:2018:i:c:p:77-87 is not listed on IDEAS
    9. 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.
    10. Leon Podkaminer, 2017. "“Thirlwall’s Law” reconsidered," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(1), pages 29-57, February.

    More about this item

    Keywords

    Balance of payments; endogenous growth; panel cointegration; pooled mean-group estimation; panel Granger-causality;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:33130. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.