ABSTRACT
This study seeks to examine the validity of Thirlwall’s ‘Law’ which contends that actual growth of domestic income must be compatible with equilibrium growth rate determined by balance of payments (BoP) to avoid crises on its external account. It also attempts to verify whether natural rate of growth is endogenously determined in the Nigerian context. The study blends autoregressive distributed lagged model (ARDL) and Toda-Yamamoto (TY) Granger econometric methods for the analysis. To achieve research objectives, study first estimate the balance-of-payments-constrained growth (BPCG) rate as well as the natural rate of growth for the period spanning 1982 to 2015. Then, it makes comparison between the estimated growth rates and actual growth of the economy. As a side test of the endogeneity hypothesis, we also test for the direction of causality between, exports, national output and labour productivity for the country. The outcome of the study showed that the Thirlwall’s Law holds for Nigeria. We equally found that the natural rate of growth adjusts towards actual growth of domestic income; and since Thirlwall’s is valid, natural rate is endogenous to BoP conditions. The results bring to the fore the importance of focusing on demand pressures in the understanding of long-run growth experience of the Nigerian economy.
Key words: Balance of payments constraint, relative prices, exports, demand components,
natural rate of growth.