Modelling economic growth with internal and external imbalances: Empirical evidence from Portugal

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 als...

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Bibliographic Details
Published inEconomic modelling Vol. 29; no. 2; pp. 478 - 486
Main Authors Soukiazis, Elias, Cerqueira, Pedro A., Antunes, Micaela
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.03.2012
Elsevier Science Ltd
Subjects
3SLS system regressions
Balance of payments
Current account
Economic crisis
Economic growth
Economic models
Elasticity of demand
Empirical research
Equilibrium growth rates
Growth models
Import elasticities of the components of demand
Internal and external imbalances
Portugal
Studies
Thirlwall's Law
Portugal
Import elasticities of the components of demand
Equilibrium growth rates
C32
O4
E12
Internal and external imbalances
3SLS system regressions
H6
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Summary: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 paper 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 recently 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. ► Developing an extended Thirlwall's model with internal and external imbalances. ► Predicting growth rates based on different economic scenarios. ► Application to the Portuguese economy.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2011.12.001