On empirical tests of Thirlwall’s law: a reply to Professor McCombie’s rejoinder

Abstract

Professor McCombie has provided a thoughtful response to my previous argument about a potential near-tautology in conventional empirical tests of Thirlwall’s law. I accept his characterization of the argument as requiring that the estimated equations must be equivalent to ‘regressions through the origin,’ which could perhaps be called a ‘statistical coincidence’ if one does not like the term ‘near-tautology.’ More importantly, tests for equality between the balance-of-payments equilibrium growth rate and the long-run average growth rate do not directly test for the adjustment mechanism that occurs in response to balance-of-payments disequilibria. Other statistical methods as well as the use of ‘historical-structural analysis’ are needed to identify whether the main adjusting variable is national income or relative prices. This Reply also defends the way balance-of-payments–constrained growth was modeled in my co-authored work with Carlos Ibarra and highlights our use of the historical-structural approach applied to Mexico.