Ebook The balance of payments as a monetary phenomenon: An econometric study of Namibia
Namibia is currently experiencing an overall balance of payments deficit, which has provoked many questions on potential causes of this imbalance. This is a cause of concern because Namibia, like any other country, aims to maintain a stable equilibrium in the balance of payments as one of the core objectives of macroeconomic policy. Organisations such as the International Monetary Fund (IMF) have been giving a great deal of attention to stable balance of payments situations.
Throughout the years different adjustment mechanisms to balance of payments disequilibria have been developed, namely the monetary approach, the elasticities approach, and the absorption approach (Du Plessis et al., 1998:235). The main aim of this paper is to examine the monetary approach to the balance of payments (MABP), which argues that the balance of payments is a “monetary phenomenon” (Salvatore, 1998:473). This approach flows from the classical price-specie-flow mechanism, and is based on the notion that money plays an important role in causing a disturbance in the balance of payments account as well as serving as an adjustment mechanism to correct the disturbance (Salvatore, 1998:473).
The MABP regards money as a stock, and argues that money stock can be changed through international reserve flows. It states that a fixed exchange rate system could work without having to resort to devaluation, provided a country has a sound monetary policy; thus, devaluation will only occur as a result of a failure of monetary policy. This argument stems from the fact that disequilibrium in the balance of payments is a temporary situation that will be corrected if the “money market is in equilibrium” (Du Plessis et al., 1998:255).
Although the monetary approach has been commended for explaining the balance of payments well, it has prompted criticism from other scholars as an approach that ignores other parts of international trade in determining the balance of payments. The MABP has been blamed for disregarding the fiscal and real factors that influence changes in the balance of payments, whilst concentrating only on monetary factors. Contrary to these views, it can be stated that the monetary approach does not ignore these factors. Valinezhad contends that “the MABP only asserts that the effect on the balance of payments of a higher rate of economic growth should be analysed with the tools of monetary theory” (Valinezhad, 1992:265).
Namibia has been running current account surpluses since 1993. Nevertheless, except for 2000, the merchandise trade balance was in deficit up to 2003 (BON, 2003). What is of concern is that the trade deficit has been increasing substantially throughout the years. This has influenced the country’s overall balance of payments significantly. The country experienced an overall balance of payments surplus for most of these years, but from 2003 the balance of payments significantly changed into a deficit (BON, 2003).
Whereas the absorption and elasticities approaches concentrate on the current account balance, the MABP emphasises the overall balance of payments including the capital account (Coppin, 1994:77). By employing the MABP, the paper intends to offer a basis for understanding the relationship between monetary policy and balance of payments problems. The research could also serve as a recommendation to monetary authorities in handling disequilibrium in the balance of payments. This study wishes to achieve an empirically robust and theoretically consistent model of the MABP in Namibia by employing multivariate cointegration and error-correction modelling during the period 1993–2003, using quarterly observations. A specific objective is to determine whether excess money supply has played a significant role in the disequilibrium of balance of payments in Namibia. In addition, the study also sets out to establish whether there is a significant relationship between domestic credit and international reserves.
The paper is structured as follows: Section 2 refers critically to the available literature, both theoretical and empirical, on the MABP. In addition, it provides a brief outline of alternative approaches to the balance of payments. Section 3 provides a background of the Namibian economy and its balance of payments situation since 1993. Section 4 describes the methodology employed including the specification of the model, while Section 5 contains the econometric analyses and discusses the empirical results. The final section states the policy implications of the MABP in Namibia and the conclusions of the research.
CONTENTS
1. INTRODUCTION
2. LITERATURE REVIEW
2.1 Review of theoretical literature
- 2.1.1 The monetary approach to the balance of payments
2.1.2 Alternative approaches to balance of payments
2.2 Review of the empirical literature
2.3 Criticisms of the MABP
2.4 Policy implications of the MABP
3. BACKGROUND TO THE NAMIBIAN ECONOMY
3.1 Namibia’s balance of payments since 1993
4. ECONOMETRIC APPROACH AND MODEL
4.1 Methodology
- 4.1.1 Data descriptions and source
4.1.2 Model specification
4.1.3 Estimation procedure
5. EMPIRICAL RESULTS AND ANALYSES
5.1 Empirical evidence
- 5.1.1 Order of integration and testing for stationarity
5.1.2 Estimating long-run relationships and checking for spurious association
5.1.3 Short-run dynamics: The error-correction model
6. POLICY IMPLICATIONS AND CONCLUSION
APPENDIX A: GRAPHS OF THE VARIABLES
APPENDIX B: BALANCE OF PAYMENTS – A SUMMARY
APPENDIX C: TRENDS IN MONEY SUPPLY, NET FOREIGN ASSETS, NET CLAIMS ON GOVERNMENT, AND CLAIMS ON THE PRIVATE SECTOR FROM 1993–2003 (IN N$ MILLION)
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