Application of the balance-of-payments-constrained growth model to Portugal, 1965-2008

The present study aims to verify whether the balance-of-payments-constrained growth approach is suitable for explaining the Portuguese growth performance during the past decades. To smooth cyclical variations, 15-year overlapping periods are considered in the computation of "Thirlwall's law," assuming that income elasticity of imports is either constant or variable over time. It is shown that actual growth can accurately be predicted by the ratio of export growth to the income elasticity of the demand for imports. Evidence also reveals that Portugal grew slightly faster than the rate consistent with the balance-of-payments equilibrium accumulating external deficits over time. Considering the pre- and postaccession periods to the European Union, it is found that Portugal grew at a slower rate in the latter period, explained by a higher income elasticity of imports and lower export growth.