Balance-Of-Payments–Constrained Growth: A Reconsideration of the Evidence for the U.S. Economy

Abstract

According to Thirlwall's Law, most industrialized nations are confronted with a balance-of-payments constraint that limits the rate of growth of domestic income. The external sector, therefore, becomes the only means to enhance a country's long-term rate of growth because, under conditions of underutilized resources, expanding domestic demand must lead to balance-of-payments deficits that cannot be permanently financed and therefore cannot be sustained. Advocates of Thirlwall's Law suggest that the United States, irrespective of its peculiar position within the global economic environment, has been confronted with an international-payments constraint during the post-World War II era (McCombie, 1992); previous studies support the view that Thirlwall's Law provides a good approximation of the actual long-term rate of growth of income of the U.S. economy (Atesoglu, 1993, 1995; Bairam, 1988; Thirlwall, 1979). The purpose of this paper is to reconsider the validity of this claim with respect to the U.S. economy. First, the appropriateness of previous estimation procedures are evaluated. Second, the presumption that relative prices may be inconsequential to the empirical findings (Bairam, 1993) is tested. Furthermore, various alternative sample periods are analyzed to determine whether the findings are sensitive to a particular time period.

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