The Predictive Power of the Balance of Payment Constraint Theory for Economic Growth

This paper describes the research carried out to test the forecasting ability of a number of models based on Thirlwall’s balance of payments constraint theory for economic growth. Economic data from 17 European countries spanning the period from 1975 to 2009 was gathered and analyzed in terms of the historical relationship between their balances of payment and their economic growth The research compares the results predicted by the models with actual growth data and attempts to arrive at conclusions with respect to whether the outcomes validate these “demand based” models and whether the manner of economic growth of core and peripheral European countries are different. It can be concluded that in most cases the balance of payments constraint based models predict economic growth within a 0.5% margin of error. In addition, this study demonstrates that if an additional return on capital related term is included in Hussain’s extended model, predictability is further increased. This research has not found any evidence for fundamental differences in economic growth between core and peripheral European countries. Variances between predicted and actual economic growth rates are country specific and cannot be generalized