Growth Rates Constrained by Internal and External Imbalances: A Demand-Orientated Approach

Elias Soukiazis, Pedro Cerqueira and Micaela Antunes

Chapter 5 in Models of Balance of Payments Constrained Growth, 2012, pp 144-167 from Palgrave Macmillan

Abstract: Abstract Thirlwall’s Law 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. The aim of this chapter is to fill this gap by developing a growth model in line with Thirlwall’s Law that takes into account both internal and external imbalances. The model is tested for Portugal, which in 2010 fell into a public debt crisis with serious negative consequences on growth. The empirical analysis shows that the growth rate in Portugal is in fact balance of payments constrained and the main drawback is the high import elasticity of the components of demand and in particular that of exports.

Keywords: Current Account; Public Debt; Income Elasticity; Nominal Interest Rate; Annual Percentage Change (search for similar items in EconPapers)
Date: 2012
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Working Paper: Growth rates constrained by internal and external imbalances: a demand orientated approach (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-02395-7_6

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DOI: 10.1057/9781137023957_6

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