A Review of Empirical Literature on Balance of Payments as a Monetary Phenomenon

Abstract

For some decades now, there has been renewed controversy on whether or not a country's balance of payments is a monetary phenomenon, and hence the appropriate policy adjustment to be adopted. Consequently, the main aim of this paper is to provide evidence of country-wide empirical studies that conform to or contradict the predictions of the monetary approach to the balance of payments. The empirical proofs in this review evidently support the argument, and contend that any disparity in the balance of payments is always necessitated by disturbances in the monetary variables in the countries concerned. Accordingly, any observed disequilibrium in a country's balance of payment can, ceteris paribus, be adroitly corrected via adjustment of domestic credits demand, and hence the size of the foreign trade balance. The monetary authorities can do this by adopting stringent monetary disciplines to limit the growth of domestic credit, so that economic agents will cut back their expenditure relative to their income, so as to rebuild their cash balances. Findings of the reviewed empirical studies will no doubt guide monetary authorities (Central Banks) in adopting appropriate policies that would ensure maintenance of satisfactory balance of payments position to avoid recurrent systematic crisis.

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