Exploring the robustness of the balance of payments-constrained growth idea in a multiple good framework

Abstract

This paper derives the balance of payments-constrained growth (BPCG) model as a special case of a three good framework that incorporates exportables, importables, and non-tradables. The conditions under which the canonical form of the BPCG rate can be derived are made explicit and the assumptions scrutinized. It is shown that the presence of nontradables, substitutability between exportables and importables, and incomplete specialization in expenditure generally dampen the externallyconstrained growth rate. These …ndings help explain why empirical estimates tend to overestimate the BPCG rate. Overall our …ndings underscore the observation that tests of the BPCG hypothesis are as much a test of the internal structure of the economy under consideration.