A Reassessment Of Balance Of Payments Constrained Growth: Results From Panel Unit Root And Panel Cointegration Tests

The paper reassesses the empirical evidence for Thirlwall's law in seven industrial countries by using panel unit root and panel cointegration tests including Johansen maximum likelihood cointegration tests. Current practice restricts attention to time series residual based cointegration tests, which are known to have low power and are subject to normalization problems. Since economic time series are typically short, it is desirable to exploit panel data in order to draw sharper inferences. The empirical results reveal that imports are cointegrated with terms of trade and income (although residual-based tests indicate the opposite). We find that, with the exception of Australia, Thirlwall's law holds. [C22, C23, O40, O57]