Balance Of Payments Constrained Growth Model Research Articles

Balance-of-payments-constrained growth model: an application to the Kazakhstan’s economy

In this paper we analyze whether the long-term economic growth of Kazakhstan is subject to macroeconomic constraints. The balance-of-payments-constrained growth (BPCG) models predict that a country’s growth rate can be approximated through the ratio of growth rates of exports to the income elasticity of demand for imports. We apply the BPCG model to Kazakhstan’s quarterly data—a typical emerging economy with a low trade to GDP ratio. To estimate the trade parameters we use Johansen’s cointegration technique. Vector error correction model is employed to analyze the short-run adjustments of income elasticities. The results demonstrate that the average growth rate estimated by the BPCG hypothesis projects around 2% long-run economic growth for Kazakhstan and current economic growth is aggregate demand constrained.

Estimation of Import Demand Elasticities, In the BPCG Model and the Import Demand Function (The Case Study of Iran)

In this study, the demand elasticities of import are estimated, with two approaches, the balance of payments constrained growth (BPCG) or Thirlwall model and the import demand function, by using data in Iran during the period 1980 to 2018 and ARDL method.
 According to BPCG model, economic growth is equal to the ratio of export growth to income elasticity of import demand, so it is related to the growth of exports and income elasticity of import demand in the long run.
 Based on this model, if national income increase and the income elasticity of import demand is high, the imports increase, the effect of export growth and consequently economic growth decreases.
 The results showed that in the long run, the income elasticity of import demand in BPCG model isequal to 0.04 and based on the import demand function is 0.34 and the relative price elasticity of import demand (the ratio of import price to domestic price) is -0.52. Therefore, imports in Iran have been more affected by price than income effects.
 Due to the smaller amount of income elasticity of import demand in both models and based on the BPCG model, the greater income elasticity of import demand, reduces the effect of export growth coefficient, it can be concluded that the magnitude of this elasticity has not been a constraint to Iran's economic growth. Given the significant impact of prices on imports, economic planners should focus on increasing the competitiveness of domestic products.

New advances and controversies in the framework of balance‐of‐payments‐constrained growth

AbstractThis article surveys selected recent contributions and debates regarding fundamental aspects of the theory of balance‐of‐payments‐constrained growth (BPCG). The survey focuses mainly on studies, from roughly the period since 2010, in four broad (and related) areas: whether and how relative prices and the real exchange rate affect export performance and long‐run growth; the role of endogenous technological progress; the causes and consequences of structural change; and the dynamics of adjustment toward (or cycles around) a long‐run growth equilibrium with a balance‐of‐payments constraint. The discussion also highlights the increasing incorporation of insights from other theoretical traditions (Kaleckian, Kaldorian, Schumpeterian, Goodwinian, and structuralist) into the BPCG framework. The survey suggests the need to clarify the underlying assumptions and policy implications of the BPCG model and to complement its focus on long‐run growth rates with analyses of medium‐run adjustments and level effects.

Path dependence, distributive cycles and export capacity in a BoPC growth model

In Dávila-Fernández and Sordi (2019), we have extended Goodwin's (1967) model to study the interaction between distributive cycles and international trade for economies in which growth is balance-of-payments constrained (BoPC). Building on that set-up, we investigate the implications of allowing exports to be a function of the capital stock. Using the existence part of the Hopf bifurcation theorem, we show that the resulting 3-dimensional system admits a limit cycle solution. We rely on numerical simulations to verify if fluctuations are persistent and bounded. Applying panel cointegration techniques, we also provide empirical evidence for a sample of 19 OECD countries between 1950–2014 that gives support to the formulation adopted for the exports function. Our main contribution lies in developing a simple base-line model to study distributive dynamics in open economies in line with recent developments in the BoPC growth literature. Furthermore, we show how the interaction between demand and innovation waves can generate complex dynamics as a representation of the statement “history matters”.

The role of intermediate inputs in a multisectoral balance-of-payments-constrained growth model: the case of Mexico

We focus on the effects of the imports of intermediate inputs over the growth performance. Such an analysis is essential insofar as some countries import large amounts of intermediate inputs to be used in the production of final goods to export. Then it arises the question of whether such a strategy is harmful to the growth performance in a balance-of-payments-constrained growth (BPCG) setup. To address this point, the paper blends the multisectoral BPCG model incorporating structural change (MSTL), by Araujo and Lima (Camb J Econ 31(5):755–774, 2007), and the BPCG model including intermediate goods by Blecker and Ibarra (Struct Change Econ Dyn 25(C):33–47, 2013), and applies the resulting framework to the Mexican economy from 1962 to 2014. The most important result is that the MSTL growth rate in the presence of foreign content of exports is lower than the ‘standard’ MSTL growth rate calculated in the usual fashion (ignoring intermediate imports). That shows the importance of considering imports of intermediate goods in a BPCG model, at least for countries such as Mexico that rely massively on them. It especially helps to explain the reduction both in the ratio of the income elasticities and the growth rate of the Mexican economy, a result also found by Ibarra (Econ Change Restruct 44:357–368, 2011).

Correctly analysing the balance-of-payments constraint on growth

The balance-of-payments-constrained growth (BPCG) model provides an interesting hypothesis regarding economic growth. The main implication is that world demand places the dominant constraint to which individual country growth adjusts. I discuss this implication and argue that tests of the BPCG model have essentially been tests of the hypothesis that trade is balanced over the long run; a plausible hypothesis but one that need not hold mainly through responses to world demand (as transmitted via income elasticities). I then discuss the role of relative prices and investment, point out logical inadequacies in the traditional BPCG framework and suggest an alternative theoretical framework to investigate its robustness. Our theoretical and empirical explorations suggest that traditional tests of the BPCG model may be misleading. Including investment as a proxy for the capacity to export and addressing endogeneity issues, for example, noticeably weakens the influence of world demand. The evidence presented contributes to reconciling evidence supporting the BPCG hypothesis with recent work that consistently finds an important role for the level of the real exchange rate and investment, independently of world demand.

An alternative explanation of India's growth transition: a demand-side hypothesis

This paper formalises the balance-of-payments-constrained (BPC) growth model in a two-regime framework to re-examine India’s growth transition in 1980 from a demand-side perspective, as an alternative to the ‘supply-oriented’ approaches of previous studies. The results provide strong evidence of a demand-led growth transition. Although the government-led expenditure strategy of the 1980s fulfilled the role of moving the Indian economy out of its slow-growing demand regime (1952– 79) into a faster-growing one, it could not sustain demand growth at the natural rate due to a balance-of-payments constraint. Consistent with the prediction of the BPC growth model, faster export growth in the post-1990 liberalisation period sustained demand growth at its maximum rate by allowing expenditure (including government spending) to grow at a fast rate. The analysis further suggests that India’s export surge in the post-1990 liberalisation period has a significant demand-side explanation, rather than an exclusively supply-side interpretation.

A note on intermediate imports and the BPCG model in Mexico

Numerous applications of the balance-of-payments-constrained growth (BPCG) model have concluded that Mexico’s equilibrium GDP growth rate fell after trade liberalization, because of a sharp rise in the income-elasticity of imports. Following the bounds testing approach of Pesaran et al. (2001), the present note estimates equations for intermediate and other types of imports in Mexico from 1960 to 2006. It shows that intermediate imports are significantly affected by manufactured exports, and that once the effect is controlled for, there is no significant rise in their income-elasticity—in contrast to what is observed for other types of imports. Since manufactured exports are highly intensive in imports, what the typical BPCG regression detects as an increase in the elasticity of intermediate imports may reflect a compositional effect, namely, the re-composition of GDP towards exports. Some implications for the BPCG model are briefly discussed in the conclusions.