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Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 16 de 2012


Slovak Economic Growth and the Consistency of the

Balance-of-Payments Constraint Approach

Elias Soukiazis
Faculty of Economics, University of Coimbra and GEMF, Portugal

Eva Muchova
Faculty of National Economy, University of Economics in Bratislava, Slovakia

The present study aims at verifying whether the balance-of-payments constrained growth approach is suitable for explaining the Slovak growth performance after its peaceful separation from the former Czechoslovakia in 1993. We use Thirlwall´s Law to predict actual growth of the Slovak economy based on the estimation of the income elasticities of demand for imports and exports, respectively. The income elasticity of demand for imports is obtained by employing 2SLS assuming that domestic income is endogenous. It is shown that the Slovak economy grew at a higher rate than the rate consistent with the balance-of-payments equilibrium at the cost of accumulating current account deficits. A sustainable solution should be focused on reducing the income elasticity of the demand for imports and increasing exports growth. In order the country not to fall into a balance-of-payments constrained growth trap policies must be designed to reduce the country´s dependence on imports by producing higher quality tradable goods.

JEL Classification: C13, E12, F43, O24.

Balance-of-Payments Equilibrium Growth Rate, Price and Income Elasticities of Foreign Trade, 2SLS Regressions.

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