VOLUME VI
SPRING 1998

THE EXTERNAL CONSTRAINT ON GROWTH: NEW APPROACHES
 
JOSÉ ANTONIO ALONSO
Universidad Complutense
CARLOS GARCIMARTÍN
Universidad de Salamanca
 
This paper falls, albeit critically, within the Keynesian tradition that assigns a relevant role to demand in the determination of the economic dynamic. Specifically, it examines the role played by the external trade balance as a conditioning factor in the growth process. The starting point is a discussion of the procedures habitually used to test the role of the external constraint, with the Spanish case serving, by way of co-integration techniques as an example of the limitations presented by a strict application of Thirlwall's law, which is based on a priori elimination of prices in the external adjustment process. As against this procedure, the paper offers an alternative approach, based on the direct identification of the variable -prices or income- upon which the external adjustment process rests. To that end, two systems of differential equations are formulated and subsequently estimated as disequilibrium models in continuous time. A broad sample made up of ten of the most representative OECD countries is used for the testing exercise. The results, in their majority, confirm the role of income in the external adjustment process, thereby confirming the Keynesian hypothesis.
 
Keywords: external constraint, growth, external trade balance, Thirlwall's law, post-Keynesianism.

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