Thirlwall's law, external debt sustainability, and the balance-of-payments-constrained level and growth rates of output

Gustavo Bhering, Franklin Serrano and Fabio Freitas
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Gustavo Bhering: Universidade Federal do Rio de Janeiro (UFRJ), Rio de Janeiro, Brazil
Fabio Freitas: Universidade Federal do Rio de Janeiro (UFRJ), Rio de Janeiro, Brazil

Review of Keynesian Economics, 2019, vol. 7, issue 4, 486-497

Abstract: Thirlwall's law, given by the ratio of the rate of growth of exports to the income elasticity of imports is a key result of balance-of-payments-constrained long-run growth models with balanced trade. Some authors have extended the analysis to incorporate long-run net capital flows. We provide a critical evaluation of these efforts and propose an alternative approach to deal with long-run external debt sustainability, based on two key features. First, we treat the external debt-to-exports ratio as the relevant indicator for the analysis of external debt sustainability. Second, we include an external credit constraint in the form of a maximum acceptable level of this ratio. The main results that emerge are that sustainable long-run capital flows can positively affect the long-run level of output, but not the rate of growth compatible with the balance-of-payments constraint, as exports must ultimately tend to grow at the same rate as imports. Therefore, Thirlwall's law still holds.

Keywords: Thirlwall's law; debt sustainability; BoP constraint on growth; Harrod foreigntrade multiplier (search for similar items in EconPapers)
JEL-codes: F32 F43 O41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (15)

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