Investigation of Balance of Payment Constrained Growth Model: The Impact of Export Growth, Capital Flows, and Real Effective Exchange Rate on Growth of the UK

Abstract

The present article employs balance of payment constrained growth model (BPCG) to investigate the relevance of exports, capital movements as well as relative prices on growth performance of the United Kingdom from 1970 to 2018. It makes use of autoregressive distributed lag model (ARDL) for the analysis. It was found that the innovative BPCG model is suitable for the explanation of growth experience of the UK. Accordingly, Keynesian mechanism-income plays the dominant adjustment role in restoring equilibrium. More interestingly, the inclusion of relative prices and capital flows in the balance of payments constraint model tends to influence the levels of output but they do not exert any substantial effect on the balance of payment equilibrium growth rate of the UK. In conclusion, the prosperity and growth of the world (OECD countries) and the expansion of exports would help in guaranteeing the steady-state of the UK economy.