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 scrutinised. It is shown that the presence of non-tradables, substitutability between exportables and importables and incomplete specialisation 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 underscore the observation that tests of the BPCG hypothesis are as much a test of the internal structure of the economy under consideration. © The Author 2010. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.