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We explain China's remarkable growth performance over the last three decades through an export-led growth (ELG) model, where countries need to export to pay for their imports. We show that China's actual long-run growth rate is well approximated by its balance-of-payments equilibrium (BOPE) growth rate, defined as the long-run growth rate consistent with current account equilibrium. This growth rate is given by the ratio of the growth rate of exports to the income elasticity of imports. We estimate the latter using the Kalman filter, which allows us to obtain a time-varying estimate of China's BOPE growth rate. We find that the average value of China's BOPE growth rate during 1981–2016 was about 11 percent but fluctuated significantly over time and declined notably after 2007. It is estimated to be 5.9 percent in 2015. We then discuss the determinants of China's BOPE growth rate and of the income elasticity of imports, with the help of the Bayesian Model Averaging technique. The analysis highlights the role of the composition of aggregate demand as the main driving force, both for its direct effects on the income elasticity of imports, and for the indirect effects on export growth via capital accumulation, in particular fixed asset investment. Our analysis has important implications to understand China's transition to a “New Normal” of a lower growth rate and the effects of the external and internal rebalancing strategy pursued from the early 2000s.

This paper analyses the performance of Indonesia's economy since the early 1980s using Thirlwall's balance-of-payments-constrained (BoPC) growth model, estimated in state-space form to take account of the varying nature of the income elasticities of demand for exports and imports. Results indicate that after peaking in the mid 1980s at above 10 percent, Indonesia's BoPC growth rate has declined significantly, to about 3 percent in recent years. This is the result of changes in the three components of this growth rate: the income elasticities of demand for exports and imports, and the growth rate of world income, all three significantly lower. Especially worrisome for Indonesia's future is the decline in the income elasticity of demand for exports, a variable that summarizes the non-price competitiveness of its exports. This is the consequence of the lack of progress in upgrading the export basket and increasing its sophistication, with natural resources and low value-added manufacturing still dominating the country's exports. Focusing on the two income elasticities, the analysis shows that their determinants are variables that proxy the economy's structural changes (for example, the manufacturing employment share) and within-sector productivity growth (for example, complexity of the economy, gross fixed capital formation as a share of GDP).

Relying on data for 90 economies over 1970-2015 and panel estimation techniques, we investigate how financial development, globalisation and technology affect income inequality. Our findings reveal significant nonlinearities, consistent with either Ushaped or inverted-U shaped relationships. As such, depending on whether a certain threshold value is achieved, the same determinants of income distribution exert opposite effects in different countries. Globalisation is associated with increasing inequality in most advanced economies, but with falling disparities for the large majority of emerging economies. Technology and financial development lead to increasing inequality for most emerging economies, while the effects for advanced economies are mixed. Furthermore, our results indicate that credit constraints act as a transmission channel for the effects of financial development on inequality, foreign direct investment and the supply of unskilled labour for the impact of technology and the supply of skilled labour for the effects of globalisation.

Relying on data for a panel of 90 economies over 1970-2015 and System-GMM estimates, we extend the standard Kuznets-curve empirical framework to investigate how financial development, globalisation and technology affect income inequality. Our findings reveal the presence of significant nonlinearities, consistent with either U-shaped or inverted U-shaped relationships. As such, depending on whether a certain threshold value is achieved, the same determinants of income distribution can exert opposite effects in different countries. Globalisation is associated to increasing inequality in most advanced economies, but to falling disparities for the large majority of emerging economies. Further, while the effects for advanced economies are mixed, technology and financial development lead to increasing inequality for most emerging economies. Hence, particularly in countries in earlier stages of development, policymakers aiming at fostering growth via technological progress or financial development should also consider the nature of the trade-offs with inequality and how policy can improve them.

Between 1962 and 2013, China's agricultural employment share declined from 82% to 31%. The transfer of workers out of low-productivity agriculture is a fundamental pillar of China's aspirations to progress and eventually become a high-income economy. We hypothesize that the drivers of this decline have been the increase in income per capita, industrial value added, foreign direct investment and domestic credit. We use an Autoregressive Distributed Lag Model to test the strong exogeneity of the regressors. This is confirmed by the data and hence we use our model for forecasting. Results indicate that the share of employment in agriculture in China will decline to about 24% by 2020, the end of the 13th Five-Year Plan (2016–2020). We also estimate that China's employment share will reach 5%, the share observed in today's rich economies, by 2042–2048.

This paper provides evidence on the role played by the real exchange rate in the growth process of emerging economies. The empirical analysis is conducted on a panel dataset of Latin-American countries over the period 1970-2010. We find keeping an undervalued real exchange rate is conducive to higher growth, at least in Granger-causality terms. In addition, we demonstrate how using standard fixed effects and mean-group estimators may lead to misleading inference, in particular on the role of the Balassa-Samuelson effect, because the appropriate estimation strategy should control for both parameter heterogeneity and cross-section dependence. These findings are independent of the particular estimator used, as well as additional regressors employed in the growth literature, or direct measures of the real exchange rate.

Relying on data for a panel of 90 advanced and emerging economies spanning the 1970-2015 period and System-GMM dynamic panel estimation, we extend the standard ‘Kuznets-curve’ empirical framework to investigate how globalisation, financial sector development and technology influence changes in the distribution of income. We take account of potential nonlinearities for all the factors involved and distinguish two technological categories: General-Purpose Technology (GPT) and Investment-Specific Technology (IST). Our empirical findings highlight technological progress as playing a key role in determining inequality dynamics. In particular, we find strong evidence supporting the ‘Schumpeterian view’ of the interplay between changes in income inequality and IST. This is characterised by a U-shaped pattern indicating that, beyond a certain threshold, IST worsens inequalities – in line with technology turning from labour-complementary to labour-replacing. The results are robust to the inclusion of additional socioeconomic and institutional quality variables in the models. In light of the growing automation process we are witnessing in recent years, these findings have significant implications for policy strategies aimed at reducing income inequality.

Inflation Targeting (IT) can be expected to play a role in structurally reducing nominal interest rates by lowering a country’s inflation expectations and risk premium. Relying on a panel of 52 advanced and emerging economies from 1975–2009, we carry out a formal investigation of this hypothesis. Our econometric strategy adopts a flexible and efficient panel estimation framework, controlling for a number of issues usually neglected in the literature, such as parameter heterogeneity and cross-section dependence. The empirical analysis is based on a dynamic model. Our findings are supportive of a view that, on average, IT leads to a reduction of short- and long-term nominal interest rates.

The People’s Republic of China’s (PRC) remarkable growth performance over the last 3 decades has been associated to very robust export growth, so much so that many refer to it as a clear example of export-led growth (ELG). Using the concept of the balance-of-payments equilibrium (BOPE) growth rate, which provides a framework to test the ELG hypothesis, we show that the PRC’s actual long-run growth is well approximated by its BOPE growth rate. This growth rate is given by the ratio of the growth rate of exports to the income elasticity of imports. We estimate the latter using the Kalman filter, which allows us to obtain a time-varying estimate of the PRC’s BOPE growth rate. We find that the average value of the PRC’s BOPE growth rate during 1981–2016 was 11%, but it varied significantly over time and declined notably after 2007. Today, it is estimated at a much lower 5.9%. We then discuss the determinants of the PRC’s BOPE growth rate and of the income elasticity of imports, with the help of the Bayesian model averaging technique. The analysis highlights the role of the composition of aggregate demand as the main driving force, both for its direct effects on the income elasticity of imports, and for the indirect effects on export growth via capital accumulation, in particular fixed asset investment. Our analysis has important implications to understand the PRC’s transition to a “New Normal” of a lower growth rate.

This paper investigates the sustainability of current accounts in advanced economies using a panel of 27 countries and annual data over the 1980–2008 period. Relying on various panel unit root tests and a sequential panel selection method, we find strong evidence in favour of nonlinear but stationary current account trajectories only for 7 countries, while the remaining 20 appear to be non-stationary and thus unsustainable. Our analysis indicates that careful empirical modelling of current account dynamics, particularly in relation to cross-section dependence and nonlinear behaviour, is crucial for appropriate economic policy-making.

Following a recent line of research, this paper investigates the aggregated effects of temperature and rainfall on economic growth in Africa. Our econometric approach is based on a reduced-form model and takes account explicitly of parameter heterogeneity and cross section dependence, relying on ARDL modelling and panel estimators with multifactor structures. We find clear supportive evidence of short- and long-run relations between temperature and per-capita GDP growth, while the role played by rainfall appears to be less important and the evidence on its statistical significance is less clear-cut. Very similar results are reported when the analysis is carried out by focusing solely on Sub-Saharan African countries or considering GDP growth per worker. This evidence is in sharp contrast to the results obtained via standard MG estimation and this confirms that, by not controlling for cross section dependence, traditional panel estimators are likely to provide misleading inference. The empirical results suggest that, far from adapting quickly to weather shocks, African economies appear to be significantly damaged by them. In the absence of corrective measures, the current trends in climate change may impose a progressively heavier burden on African countries.

In this paper we evaluate the role of inflation targeting (IT) in enhancing monetary policy credibility in emerging economies. We construct a time-varying credibility index, and then carry out extensive testing in order to assess whether IT had a significant impact on monetary policy credibility. Our results confirm that credibility was on average lower for targeters than non-targeters before the regime change, and show that the gap was closed after the adoption of IT. However, taking mean reversion into account, we find no significant evidence that IT bolstered credibility levels.

This paper investigates the determinants of regional unemployment disparities in Italy. Relying on panel unit root tests and data over the 1977–2003 years, we reject the hysteresis hypothesis and then proceed to estimate the non-accelerating inflation rate of unemployment (NAIRU) for each of the 20 Italian regions. Our estimates of the regional NAIRUs turn out to be fairly precise and allow us to draw two interesting conclusions. First, the hypothesis of constant regional NAIRUs between 1977 and 2003 is supported by the data. Second, we find that there is a significant degree of heterogeneity among the regional NAIRUs.

Potential output growth generally decelerated after the global financial crisis during 2008–2009. This paper examines the possible determinants of potential output growth using Bayesian Model Averaging and assesses how the determinants can be used to increase the growth of potential output. It finds that the long-term growth of working-age population, the tertiary level gross enrollment ratio, the technology gap with the United States (US), labor market rigidity, trade openness, financial integration and the quality of institutions robustly affect potential output growth. Using Harrod’s definition of potential output growth as the sum of the long-run growth rates of the labor force and labor productivity, we find that the trend growth rate of working-age population is a good proxy variable for long-run labor force growth. Under this definition, the other determinants affect potential output growth through their impact on the growth of labor productivity. The paper finds support for the hypotheses that tertiary enrollment and trade openness affects potential output growth nonlinearly. It also finds that trade openness and tertiary enrollment have nonlinear effects on potential output growth, and that the technology gap with the US and financial integration have statistically significant interaction effects on potential output growth. Results suggest that reforms aimed at reducing the technology gap with the US and increasing the extent of financial integration have lower impact on countries with high-quality institutions.

We estimate the People’s Republic of China’s (PRC’s) potential growth rate in 2012 at 8.7% and at 9.2% for the average of 2008-2012, about the same as the average actual growth rate for this period. This rate is the natural growth rate, that is, the rate consistent with a constant unemployment rate and stable inflation. The PRC’s natural growth rate displays a downward trend since 2006, when it peaked at 11.1%. Probably the Great Recession has been an important factor, although we argue that there are other factors. We show that the PRC’s potential growth rate is not demand constrained, in particular by the balance of payments. The PRC’s potential growth rate is determined by the supply side of the economy, in particular by: (i) changes in the structure of the economy, in particular in the share of industrial employment; (ii) the working-age population; (iii) the share of net exports in gross domestic product (GDP); (iv) export growth; (v) the share of foreign direct investment (FDI) in GDP; and (vi) human capital accumulation.

From 1962 to 2013, the People’s Republic of China’s (PRC’s) agricultural employment share declined from 82% to 31%. The transfer of workers out of low-productivity agriculture is a fundamental pillar of the PRC’s aspirations to progress and eventually become a high-income economy. We hypothesize that the drivers of this decline have been the increase in income per capita, industrial value added, foreign direct investment, and domestic credit. We use an Autoregressive Distributed Lag Model to test the strong exogeneity of the regressors so that we can use it for forecasting. Results indicate that the share of employment in agriculture in the PRC will decline to about 24% by 2020, the end of the 13th Five-Year Plan (2016-2020). We also estimate that the PRC’s employment share will reach 5%, the share observed in today’s rich economies, by 2042-2048.

This paper implements a panel approach to investigate the empirical relevance of ‘Thirlwall’s law‘, which states that long-run growth must be consistent with balance of payments (BOP) equilibrium and is thus determined on the demand side. Building on autoregressive distributed lag modelling, mean-group and pooled mean-group estimation methods, we use annual data over the 1960–2010 period for a panel of 22 OECD countries and find significant support for the ‘law’. Next, we also explore empirically the hypothesis that the BOP-constrained growth rate (y B) must equal the natural (or potential) rate of growth (y N) and find that the data do not reject this hypothesis. Finally, we adopt a new approach, based on panel Granger causality methods, to explore the direction of causality between y B and y N. The results indicate the existence of unidirectional long-run causality from y B to y N, thus reinforcing the view, embodied in the law that long-run growth is determined by demand and constrained by the BOP.

Building on standard growth-theory models, this paper provides an empirical investigation of the effects of crime on regional economic performance in Italy, as measured by labour productivity growth. Our analysis relies on a panel of annual data on the Italian regions and, contrary to previous studies in the field, adopts a flexible and efficient panel estimation approach which controls for parameter heterogeneity, cross-section dependence and variable endogeneity via mean-group estimation, multifactor modelling and Granger-causality methods. Our results strongly support the hypothesis that crime has significant negative effects on regional growth in Italy.

Lanzafame M. Is regional growth in Italy endogenous?, Regional Studies. This paper investigates the extent to which the natural rate of growth of the Italian regions is endogenous, in the sense that it is affected by actual growth. Using annual data for the period 1977–2003, mixed support is found for the endogeneity hypothesis. Furthermore, in line with recent findings in the literature, the analysis provides evidence of asymmetries in Okun's law when growth is endogenous. Lanzafame M. La croissance regionale en Italie, est-elle vraiment endogene?, Regional Studies. Cet article cherche a examiner dans quelle mesure le taux de croissance naturel des regions italiennes est endogene, en ce sens que elle est touchee par la croissance reelle. A partir des donnees annuelles pour la periode allant de 1977 jusqu'a 2003, on trouve du soutien mitige en faveur de l'hypothese endogene. Qui plus est, en accord avec des resultats recents dans la documentation, l'analyse fournit des preuves des asymetries dans la loi O...

This paper investigates the nature of regional unemployment in Italy. Taking as a starting point the evidence of growing disparities in the 1977-2003 years, we assess whether regional unemployment rates are diverging from each other in a non-stationary way, i.e. as a result of pure hysteresis. Relying both on univariate and panel unit-root tests, we show that the finding of a unit root in the Italian regional unemployment rates, which previous studies provided evidence of, is largely dependent on the use of low power tests. Exploiting the greater power of panel unit root tests allows us to confidently reject the unit root and, thus, the pure hysteresis hypothesis. The implication of this result is that, however persistent, shocks to regional unemployment will be temporary, in the sense that unemployment will return to its natural rate or NAIRU in the long-run. We, then, proceed to estimate the NAIRU for each of the 20 Italian regions. Our estimates of the regional NAIRUs turn out to be fairly precise, at least if compared to similar studies in the literature, and allow us to draw two interesting conclusions. Firstly, the hypothesis of a constant NAIRU between 1977 and 2003 is supported by the data for all of the Italian regions, with the possible exception of Abruzzo. Secondly, we find that there is a significant degree of heterogeneity among the regional NAIRUs. Thus, long-term regional unemployment disparities do seem to reflect structural or equilibrium unemployment differences across regions, as implied by the results of the unit root tests. This suggests that economic policy intervention aimed at reducing long-term regional unemployment differentials in Italy should, as much as possible, be region-specific in character. National policies, homogenous across regions, are likely to have diverse effects on the regional NAIRUs.

Comprising specially commissioned essays, the Handbook provides a comprehensive overview of alternative theories of economic growth. It surveys major sub-fields (including classical, Kaleckian, evolutionary, and Kaldorian growth theories) and highlights cutting-edge issues such as the relationship between finance and growth, the interplay of trend and cycle, and the role of aggregate demand in the long run.