Balance of Payments Constrained Growth in the Eurozone: Evidence onMulti-Sector Thirlwall’s Law for a Sample of 9 Founding Euro Countries, 1992-2019

Abstract

This article examines Thirlwall's Law for a sample of 9 eurozone countries from 1992 to 2019. Thirlwall's Law states that a country's long-run growth rate is determined by the ratio of its income elasticities of demand for exports and imports. Using product level data from COMTRADE, this article constructs 5 main sectors based on technological intensity and estimates exports and imports equations for each sector and country in error correction model form. Estimation techniques are seemingly unrelated regressions for exports and three stages least squares for imports. The results reveal significant variations in the income elasticities across sectors and countries, with a strong correlation between higher elasticities for more technological sectors, especially among the so-called central economies. The article concludes that Thirlwall's Law is both a strong predictor of actual growth rates and a useful tool for understanding the role of external imbalances on Eurozone’s economic performance during the last decades.