Thirlwall's law and the two-gap model: toward a unified "dynamic gap" model

Abstract

This paper puts forward a unified model of two of the most relevant demand-based explanations of economic growth—Thirlwall's law and the two-gap model. Under certain specifications, it is shown that Thirlwall's law extended with capital flows is equivalent to the "external gap." Our unified model, expressed in growth rates, is particularly useful to explain short-term growth in developing countries. Relevant policy implications are also drawn from the results.