Testing the demand-led and BOP-constrained growth model: a system approach

In a series of articles of the journal Applied Economics there was an extensive debate on the Balance-of-Payments (BOP)-constrained growth model and its testing. This led to a single-equation-based test for the necessary condition of the BOP-constrained growth model that the BOP constraint binds. Since then many extensions and applications of the basic BOP-constrained growth model have appeared in the related literature, but the empirical model evaluation methodology has not been developed to further test the sufficient condition that causality runs from foreign demand or exports determined by it to GDP rather than the other way round. This study utilizes the standard vector error correction model (VECM) to formalize a system approach to empirical testing of both the necessary and sufficient conditions.