Growth rates constrained by internal and external imbalances and the role of relative prices: empirical evidence from Portugal

Elias Soukiazis · Pedro André Cerqueira · Micaela Antunes

30 citations0/0 files storedJournal of Post Keynesian Economics

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Economic Theory and Policy Monetary Policy and Economic Impact Fiscal Policies and Political Economy

Abstract

Thirlwall's law (Thirlwall 1979) considers that growth can be constrained by the balance of payments when the current account is in permanent deficit. The 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 shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. Recently, Soukiazis, Cerqueira, and Antunes (2012a) developed a model-hereafter the SCA model-that takes into account both internal and external imbalances but in which relative prices do not play any role on the pace of economic growth. The aim of this paper is to extend the SCA model by relaxing this assumption and introducing explicitly relative prices into it. The model is tested for Portugal, which recently (2011) fell into a public debt crisis with serious negative consequences for growth. It is shown that our new model makes a significant improvement in explaining actual growth in Portugal. Our empirical analysis reveals that Portuguese growth is balance-of-payments constrained and that policies aimed at reducing external imbalances and changing the share of imports and exports toward trade equilibrium will help the economy to grow faster. Competitive devaluations and lower costs of financing the economy also produce an important stimulus to growth.

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References

1994The Balance-of-Payments Constraint as an Explanation of International Growth Rate Differences 1951The Nonlinear Accelerator and the Persistence of Business Cycles 1982The Non-linear Accelerator and the Persistence of Business Cycles 1982THE BALANCE OF PAYMENTS CONSTRAINT, CAPITAL FLOWS AND GROWTH RATE DIFFERENCES BETWEEN DEVELOPING COUNTRIES *1994Economic Growth and the Balance-of-Payments Constraint.1994Economic Growth and the Balance-of-Payments Constraint 1997The balance of payments constraint as an explanation of international growth rate differences 1952Overcapacity and the Acceleration Principle

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