Does foreign trade limit the economic growth of regions?

Abstract In this paper, we analyse the influence of interregional trade on regional economic growth, adopting balance-of-payments constrained regional growth model. To do this, we extend the model theoretically by incorporating interregional trade relations and then make an empirical application to Spanish regions for the period 1996–2018. The results obtained from the empirical application show that the restriction would not have limited economic growth in the case of Spanish regions. We therefore evaluate the possibility that there may be interregional fiscal and financial flows that make the persistence of internal trade imbalances possible in the long term and that the restriction on growth does not work. To verify this explanation, we test whether the differences between real and constrained growth can be explained by proxy variables of both types of flows. The conclusion is that fiscal flows could explain this difference, indicating that they might exert a compensatory effect that counteracts the restriction of the balance.