Does the balance of payments constrain economic growth? New evidence for Chile 1980-2019. The role of capital flows
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Abstract
Thirlwall (1979) stated that economic growth mainly in developing countries is limited by the balance of payments, due to dependence on exports. The objective of this paper was to verify the economic growth under the Thirlwall's law approach extended to capital flows for the Chilean case during 1980-2019. The data were obtained from the World Bank development indicators (2021). An econometric strategy was applied through the process of a Vector Autoregressive (VAR) model, Granger causality (1969), Engle-Granger (1987) and Johansen (1991) cointegration, and finally a Vector Error Correction (VEC) model is estimated to determine the long-run relationship. The results show that Thirlwall's Law is satisfied. Furthermore, by integrating capital flows (FDI) the country has demonstrated a long-run relationship. There is a bidirectional relationship between Gross Domestic Product (GDP) and exports, and a unidirectional relationship going from GDP to FDI. Economic policy could focus on diversifying exports, and encouraging the entry of new capital by relaxing domestic regulatory terms.
URL: https://revistas.uta.edu.ec/erevista/index.php/bcoyu/article/view/1851
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