Income elasticity of imports and Thirlwall’s Law: an application of the Markov-Switching method for Brazil (1995-2016)

Abstract

This article analyzes the behavior of income elasticity of Brazilian imports in the period 1995-2016 and whether there is evidence of non-linearity of the elasticity. The calculated elasticity allowed us to test the validity of the Thirlwall Law, if Brazil's economic growth has been constrained by the balance of payments. To estimate the elasticity this study employs Markov-Switching method that pemits the segmentation in regimes of the estimated parameters. Two regimes were defined. For the first, the elasticity was 4.78 with an expected duration of 1.3 quarters, while for the second regime, the elasticity was equal to 0.62 and duration of 3.4 quarters. Based on these elasticities, the hypothesis underlying the Thirlwall Law was confirmed, the balance of payments restricted the Brazilian economic growth in the period.