Alberto Bagnai

Structural changes, cointegration and the empirics of Thirlwall's law

Thirlwalls law establishes a relation between the long-run growth rate, the growth of exports and the long-run income elasticity of imports. The estimation of this parameter requires cointegration techniques, which in turn require a large span of data, thus exposing the estimates to risks of structural changes. While this problem has been recognized in the literature, the evidence produced is still partial, being concerned with a very limited number of countries, and in some respects unsatisfactory. In this article we fill this gap by assessing Thirlwalls empirical regularity on a sample of 22 Organization for Economic Cooperation and Development (OECD) countries using econometric techniques that allow for the presence of a shift of unknown date in the long-run parameters. The results are generally supportive of Thirlwalls hypothesis and allow us to reconcile and qualify the evidence provided in the existing literature.

Unit root tests of capital mobility in the less developed countries

ConclusionsThis article contributes to the ongoing debate on international capital mobility in the LDCs. The extent of capital mobility has been assessed in a time-series context, performing unit root tests on the adjusted current account for thirty-seven developing countries. The results show that the hypothesis of capital mobility cannot be rejected in a large number of countries.

Dynamic Paths of the European Economy: Simulations with an Aggregate Model of the EMU as a Part of the World Economy

The development of the European economy is a subject of remarkable interest in the current debate on the world economy. The performance of the Economic and Monetary Union (EMU) in terms of growth and unemployment is still unsatisfactory in comparison with that of the United States and of the European non-EMU countries, especially the United Kingdom. This has led some authors to investigate the existence of a deflationary bias in EMU monetary and fiscal policy rules (see for instance Altavilla and Marani, 2002). What is probably more significant, the concern that a restrictive monetary policy from the ECB might hinder the weak recovery of the EMU is shared by multilateral agencies such as the OECD (see Cotis, 2003) and the IMF (see chapter 1 and figure 1.5 in IMF, 2003).

Generalized Balance of Payments Constrained Growth and South—South Trade in Sub-Saharan Africa

Using a multi-country generalization of Thirlwall’s law, we investigate the contribution to the growth performance of Sub-Saharan Africa (SSA) countries of trade with the low and lower-middle income countries in SSA and South Asia in the last two decades.* Unlike previous multi-country extensions of Thirlwall’s law, our model allows us to measure the contribution to the balance of payments constrained growth of the partner countries’ growth rates, the bilateral terms of trade, and the bilateral market shares (for imports and exports). This degree of detail provides useful insights on the functioning of the BoP constraint in a multi-country setting. The generalized law is estimated using a panel cointegration approach on a sample of 20 developing SSA countries, using annual data from 1990 to 2008 and considering three partner areas: SSA itself, developing Asia, and the rest of the world. Our generalized law is found to perform better than other versions of the law. Moreover, the empirical analysis shows that although each partner area has contributed to the relaxation of SSA countries’ BoP constraint, these contributions have occurred through different channels of transmission. On average, the main contribution of other SSA countries occurs through the real growth effect, that of developing Asia through the market share effect, and that of the rest of the world through the terms of trade effect.

Keynesian and Neoclassical Fiscal Sustainability Indicators, with Applications to EMU Member Countries

The purposes of this paper are twofold: first, it aims at critically evaluating the solvency criterion, pioneered by Hamilton and Flavin (1986), which is nowadays almost hegemonic in the analysis of public debt sustainability, and at illustrating alternative measures of sustainability grounded on the dynamic stability approach originated by Domar (1944); secondly, it looks at sustainability in EMU member countries, with particular attention given to the relations between sustainability and the design of fiscal rules. The results show that the 3% rule imposed by the Maastricht treaty can be justified as a sustainability requirement for an “average†EMU member country. At the same time, the dispersion around this average is quite substantial: this questions the viability of uniform deficit caps across EMU member countries.

Italy’s decline and the balance-of-payments constraint: a multicountry analysis

Abstract According to the literature, the decline experienced by the Italian economy in the last two decades depends on a slowdown of its labour productivity, starting in the 1990s. The supply-side explanations of this slowdown are inconsistent with the major stylised facts. In this paper, we verify whether a better explanation is provided by the effect of a negative demand shock, through Italy’s external constraints, in the framework of Kaldor-Dixon-Thirlwall’s cumulative growth model. To this end, we use a multi-country generalisation of Thirlwall’s balance-of-payments-constrained growth model, which allows us to investigate the contribution of Italy’s main trade partners to Italy’s long-run growth from 1970 to 2010. The trade partners are disaggregated into seven groups: Eurozone core, Eurozone periphery, United States, other European countries, OPEC countries, BRIC, and the rest of the world. The results show that Italy’s long-run growth has been consistent with the Bop-constraint, that its decline can be explained by a progressive tightening of this constraint, that the sudden slowdown of labour productivity in the 1990s corresponds to a major shock on Italy’s external constraint, and that the major contributions to this shock came, through different channels of transmission, from the core Eurozone countries and from OPEC countries.

Economic growth and balance of payments constraint in Vietnam

Abstract Our paper examines the long-run relation between economic growth and current account equilibrium in Vietnam, using a multicountry balance-of-payments-constrained growth model. We find that for the whole sample (1985–2010) Vietnam grew less than the rate predicted by the model. We also find that the balance-of-payments-constrained growth rate shifted after the 1997 Asian crisis. Since the relative price effect is neutral, the volume effects dominate in setting the balance-of-payments constraint. On the one hand, owing to the high income elasticities of exports, growth in advanced countries has a strong multiplier effect on the Vietnamese economy. On the other hand, this effect is hindered by a strong “appetite” for imports coming from Asia. Finally, we assess the impact of the current crisis on Vietnam’s growth for the period 2011 to 2017.

Killing two birds with one currency: Income and fiscal policies in a growth model of a currency union

Abstract Building on a two-country Kaleckian model of a currency union, we examine the consequences of balance-of-payments adjustment policies, focusing on the interdependence between the long-run growth paths of member countries. The model separates the short-run from the long-run dynamic, comparing price and wage dynamics in each country in the light of Thirlwall’s balance-of-payments-constrained growth model. We show that by shifting the burden of adjustment to the less competitive country, austerity and wage moderation policies lead to long-term recessionary effects. Only expansionary policies in the more competitive country can achieve the two goals of reducing external imbalances and increasing the long-run growth rate in both member countries.

Monetary integration vs. real disintegration: single currency and productivity divergence in the euro area#

Productivity slowdown plays a prominent role in the build-up of the euro area crisis. This phenomenon affected member countries asymmetrically, causing divergence in their productivity trends. Recent research traces this divergence back to monetary integration. After reviewing the arguments that link real “disintegration” of the euro area to its monetary integration, we assess them empirically by modelling the evolution of labour productivity using a panel of sectorial data. The results indicate that monetary unification may actually have fostered divergence in productivity trends, and suggest some economic policy measures that could prevent further divergence.

Neoclassical versus Kaldorian Explanations of Southern Europe’s Productivity Slowdown

The productivity slowdown in European countries is among the major stylised facts of the last two decades. Several explanations have been proposed: some focus on demand-side effects, working through Kaldor’s second law of economic growth (also known as Verdoorn’s law), others on supply- side effects determined by a misallocation of the factors of production, caused either by labour market reforms or by perverse effects of financial integration (in Europe, related to the adoption of the euro). The latter explanation is put forward by some recent studies that stress how low interest rates brought about by the monetary union may have lowered productivity by inducing capital misallocation. The aim of this paper is to investigate the robustness of the latter empirical findings and to compare them with the alternative explanation offered by the post-Keynesian growth model, which instead emphasises the relation between foreign trade and productivity, along lines that go back to Adam Smith. To do so, we use a panel of industry-level data extracted from the EU KLEMS database, comparing these alternative explanations by panel cointegration techniques. The results shed some light on the role played by the single currency in the structural divergences among euro area member countries.