Template-type: ReDIF-Paper 1.0
Author-Name: Sartorello Spinola, Danilo
Author-Email: sartorello@merit.unu.edu
Author-Workplace-Name: UNU-MERIT
Title: Debating the assumptions of the Thirlwall Model: A VECM analysis of the Balance 
	 of Payments for Argentina, Brazil, Colombia, and Mexico
Abstract: This article challenges the main assumptions of the Balance of Payments 
	 Constrained Model (BPCM, aka Thirlwall model) related to the long-run: 
	 (1) equilibrium of the trade balance. (2) Stability of price-effects. 
	 (3) Foreign income growth positively affecting domestic income. Some 
	 authors raise the argument that the BP is rarely observed in equilibrium 
	 (Alonso & Garcimartín, 1998); price effects, through the real exchange 
	 rate, do affect the long-run (Rodrik, 2008); and foreign income has no 
	 effect (or negative) on domestic income (Razmi, 2016). The BPCM is based 
	 on its assumptions to defend the existence of a long-run growth rate 
	 compatible with a stable growth of the balance of payments, in which the 
	 effective growth rate converges to avoid external constrains (McCombie & 
	 Thirlwall, 1994; Thirlwall, 1979). In order to challenge the assumptions 
	 of the BPCM, we apply a time series co-integration Vector Error 
	 Correction Model (VECM) using the BPCM related variables to Argentina, 
	 Brazil, Colombia, and Mexico, the larger countries in Latin America. The 
	 data source is the Penn World Tables (PWT) for 1950-2014. We apply 
	 impulse-response and permanent shocks in selected variables, observing 
	 their effects on Real Exchange Rate, GDP, and Trade Balance. The results 
	 are compared to the assumptions raised in this research; we empirically 
	 find that the BPCM assumptions are not empirically robust for the 
	 selected countries. This offers an invitation to more empirical work 
	 that can strength the arguments of the BPCM model
Classification-JEL: O11, F41, E12
Keywords: Balance of Payments Constrains, Latin America, Economic Development
Series: UNU-MERIT Working Papers
Creation-Date: 20200114
Number: 2020-001
File-URL: https://unu-merit.nl/publications/wppdf/2020/wp2020-001.pdf
File-Format: application/pdf
File-Size: 275 Kb
Handle: RePEc:unm:unumer:2020001