El Salvador: On the External Restriction to Growth

Abstract

The study discusses the Balance of Payments Constrained Growth Model, or simply the external constraint to growth. It refers to difficulties that little economies face to growth in presence of persistent external deficits. Depreciation of exchange rate has been utilized for inject competitiveness to exports and achieve smaller trade deficits. But this result is not guaranteed. This study investigates whether an exchange rate depreciation would alleviate the trade deficit of the Salvadoran economy. To do this, the method of autoregressive distributed lags in its non-linear version, NARDL, is applied to a sample of annual time series in the period 1960 to 2016. The results corroborates our previous results for the country: the urgency of de-dollarizing the Salvadoran economy, applying an active exchange rate policy that makes exports competitive and alleviates the external restriction on growth.