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GEMF

Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 14 de 2013

   

The Effects of Internal and External Imbalances in Italy's Economic Growth.

A Balance of Payments Approach with Relative Prices no Neutral.

(Publicado em Economic Modelling 40: 334-341, 2014)


Elias Soukiazis

Faculdade de Economia, Universidade de Coimbra e GEMF

Pedro André Cerqueira

Faculdade de Economia, Universidade de Coimbra e GEMF

Micaela Antunes

Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro e GEMF

Abstract:

Thirlwall’s Law (Thirlwall, 1979) considers that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. The Law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances emerging from budget deficits or public debt can also constrain growth. The recent European public debt crisis of peripheral countries (including Italy) shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. Recently, Soukiazis et al. (2013) developed a model– henceforth the SCA model - that takes into account both internal and external imbalances and where relative prices are not neutral in the pace of economic growth. The SCA model proved to be accurate in explaining economic growth in Portugal. The aim of the present paper is to apply the SCA model to Italy and check its precision for explaining the growth path in this country. Italy is an interesting case study of a larger economy with a lack of growth in the last decade facing serious internal imbalances caused by high deficit and public debt. Our empirical analysis shows that Italy grew at a slower rate than its potential capacity due to supply constraints. Policies designed at increasing external competitiveness and lowering the costs of financing the economy are shown to be effective strategies to achieve higher growth.


JEL Classification:
C32, E12, H6, O4.

Keywords:
internal and external imbalances, price and income elasticities of external trade, equilibrium growth rates, 3SLS system regressions, supply constraints.

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