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Slovak economic growth and the consistency of the balance-of-payments constraint approach

Elias Soukiazis () and Eva Muchova
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Eva Muchova: Faculty of National Economy, University of Economics in Bratislava, Slovakia

No 2012-16, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: The present study aims at verifying whether the balance-of-payments constrained growth approach is suitable for explaining the Slovak growth performance after its peaceful separation from the former Czechoslovakia in 1993. We use Thirlwall´s Law to predict actual growth of the Slovak economy based on the estimation of the income elasticities of demand for imports and exports, respectively. The income elasticity of demand for imports is obtained by employing 2SLS assuming that domestic income is endogenous. It is shown that the Slovak economy grew at a higher rate than the rate consistent with the balance-of-payments equilibrium at the cost of accumulating current account deficits. A sustainable solution should be focused on reducing the income elasticity of the demand for imports and increasing exports growth. In order the country not to fall into a balance-of-payments constrained growth trap policies must be designed to reduce the country´s dependence on imports by producing higher quality tradable goods.

Keywords: balance-of-payments equilibrium growth rate; price and income elasticities of foreign trade; 2SLS regressions. (search for similar items in EconPapers)
JEL-codes: C13 E12 F43 O24 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2012-10
New Economics Papers: this item is included in nep-pke
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