Working Paper, University of Massachusetts, Department of Economics 2009-10
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 non-tradables, substitutability between exportables and importables, and incomplete specialization in expenditure generally dampen the externally-constrained growth rate. These findings help explain why empirical estimates tend to overestimate the BPCG rate. Overall our findings under-score the observation that tests of the BPCG hypothesis are as much a test of the internal structure of the economy under consideration.
balance of payments-constrained growth model non-tradables demand-led growth real exchange rates terms of trade