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Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 08 de 2014


Is the Slovak Economy Doing Well? A Twin Deficit Growth Approach

Elias Soukiazis

Faculdade de Economia, Universidade de Coimbra e GEMF

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

Pedro A. Cerqueira
Faculdade de Economia, Universidade de Coimbra e GEMF

Recently, Soukiazis E., Cerqueira P., and Antunes M. (2013) developed a model – hereafter the SCA model - that takes into account the hypotheses that internal and external imbalances can affect economic growth and additionally relative prices are assumed to be not neutral in the pace of economic growth. Although the SCA model is in the spirit of the well known balance of payments constraint hypothesis which became known as Thirlwall´s Law (Thirlwall, 1979) it is more complete in the sense that it considers, along with external imbalances (trade deficits) that internal imbalances (budget deficits or public debt) are additional constraints to economic growth. The recent euro-zone public sovereign debt crisis that started in some peripheral countries shows that when internal imbalances are excessive they can constrain growth and domestic demand, causing severe effects on unemployment rates. The aim of this paper is to apply the more complete SCA model to the Slovak economy (a newly euro-zone member since 2009) and check its accuracy for explaining the growth path in this country. Our empirical analysis shows that Slovakia grew at a higher rate than that allowed by the balance of payments constraint rate and this is consistent with the accumulation of current deficits over the period considered. A scenarios analysis shows that improving trade competitiveness and changing the import and export shares toward current account equilibrium will be the most successful way to achieving higher growth in Slovakia. Financing the economy at a lower cost is also beneficial to 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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