The balance-of-payments constraint on economic growth in a long-term perspective: Spain, 1850-2000


Hence, if there is no long-run trend in the real exchange rate, , we would have the following condition



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Hence, if there is no long-run trend in the real exchange rate, , we would have the following condition:

i.e., a country growing relatively faster should have a relatively higher income elasticity for exports than for imports; this is Krugman’s (1989) “45-degree rule”. From here, we can get a related result, by finding the balance of payments-constrained growth rate, , i.e., the maximum growth rate a country can achieve while keeping in equilibrium the balance of payments, and provided that the real exchange rate remains unchanged:



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