Structural breaks, reserve currency and balance of payments constrained growth: a test of Thirlwall’s Law in the UK (1950-2017)

ABSTRACT

We apply Thirlwall’s law (Thirlwall 1979) to estimate long run growth in the UK. In particular, we develop a new test allowing for potential structural breaks based on 2SLS to remedy potential weaknesses that existed in previous methods. Our results show the UK had different balance of payments positions over different time periods, and its growth has been constrained over the past two decades. We further elaborate on the pound’s changing role as a reserve currency and how this has affected the UK’s external constraint and growth.

KEYWORDS:

• Thirlwall’s law
• balance of payments
• reserve currency
• UK
• growth

JEL CLASSIFICATION:

• F30
• N20
• O11
• O16
• O24.

Disclosure statement

No potential conflict of interest was reported by the author(s).