Job Market Paper: The Role of Price Competitiveness in the Balance of Payments Constrained Growth Framework

Abstract: Tests of the balance of payments constrained growth model typically focus on income elas-

ticities of demand in the traded sector. The role of price-competitiveness is treated as negligible

and often neglected. This paper presents alternative specications for the terms-of-trade in con-

ventional constant elasticity import and export demand equations. It is shown that by taking

into consideration the export prices of foreign competitors and prices of domestic substitutes

for imports, relative prices become far more relevant in determining import and export demand

and the corresponding equilibrium growth rates in a Keynesian framework. The results suggest

policy strategies for developing economies given the absence of domestic substitutes for import

goods and the dependence on exports as a source of foreign currency.

Alex Pelham,
Oct 6, 2018, 2:28 PM