Testing the balance of payments constrained growth model in a VECM framework: the cases of Brazil, Korea, Mexico and Turkey

Abstract

The aim of this study is to explore the empirical application of a previously unexplored procedure to systematically estimate and test the tenets of the balance of payments constrained growth (BOPCG) the model within a VECM framework. The three structural equations that constitute the BOPCG model are estimated as long run equilibrium relations using the Johansen cointegration analysis technique for Brazil, Korea, Mexico and Turkey over the 1980–2016 period. The BOPCG hypothesis is then tested in terms of non-linear coefficient restrictions on the cointegrating vectors. Hypotheses on the exogeneity of real exchange rate and the world income are also tested in terms of tests on the adjustment coefficients. Results provide evidence in favour of Thirlwall’s Law for the cases of Brazil and Korea.