Correctly Analyzing the Balance of Payments Constraint on Growth
The BPCG model provides an interesting hypothesis regarding economic growth. The main implication is that world demand places a constraint on individual country performance. I discuss this implication and argue that tests of the BPCG model have essentially been tests of the hypothesis that trade is balanced over the long run; a plausible hypothesis but one that need not hold mainly due to demand-side constraints. I then discuss the role of relative prices and investment, point out logical inadequacies in the traditional BPCG framework, and suggest an alternative theoretical framework to investigate its robustness. Our theoretical and empirical explorations contribute to reconciling evidence supporting the BPCG hypothesis with recent work that consistently ?nds an important role for the level of the real exchange rate and investment, independently of world demand growth.
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