On the dynamics of balance of payments constrained growth

This paper assesses the dynamic behaviour of policies for resolving trade deficits. We extend the Thirlwall-based model by introducing an equation for setting current account policy. Steady-state solutions implying current account equilibrium emerge under autonomous spending contraction, exchange rate devaluation, export expansion, and import reduction. Stability holds with plausible restrictions. Simulations based upon the United States reveal that autonomous spending, import, and export policies behave similarly in correcting trade deficits. Exchange rate devaluation generates considerably slower adjustment. Corresponding output growth paths are also examined. The study formally incorporates dynamics into the Thirlwall approach for analysing balance of payments constrained growth.