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Monetary Approach to Balance of Payments: The Evidence on Reserve Flow from Pakistan

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  • Faiz Bilquees

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

The monetary approach to balance-of-payments theory suggests that balance of payments defecits are related to disequilibrium in the international money market and, as such, involve a flow of international reserves. A cross-section study of 39 LDCs, including Pakistan, validates the MABOPs theory for the analysis of balance of payments of these countries despite the absence of underlying assumptions in these countries. It is contended that while it may be possible to obtain significant'results on a cross-section basis, the individual country data for many of these LDCs may not validate the MABOPs theory, mainly due to the absence of underlying assumptions, due to significantly heterogenous economic structures in many of these countries, and due to the common prevalence of restrictive financial policies in a large number of LDCs. In this paper the propositions of the MABOPs theory are tested for Pakistan only, using the same model as applied to 39 LDCs on a cross-section basis. The results show that reserves movement in Pakistan cannot be explained by the version of MABOPS theory.

Suggested Citation

  • Faiz Bilquees, 1989. "Monetary Approach to Balance of Payments: The Evidence on Reserve Flow from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 28(3), pages 195-206.
    • Handle: RePEc:pid:journl:v:28:y:1989:i:3:p:195-206
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    Cited by:

    1. Ghilous Azeddine & Ziat Adel, 2023. "Balance of Payments as a Monetary Phenomenon: An ARDL Bounds Test Method for Algeria," Folia Oeconomica Stetinensia, Sciendo, vol. 23(1), pages 64-86, June.
    2. Thanh, Su Dinh & Canh, Nguyen Phuc & Doytch, Nadia, 2020. "Asymmetric effects of U.S. monetary policy on the U.S. bilateral trade deficit with China: A Markov switching ARDL model approach," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    3. KHAN, Muhammad Arshad, 2008. "Long-Run And Short-Run Dynamics Of Foreign Exchange Reserves Flows And Domestic Credit In Pakistan," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 5(1), pages 61-78.
    4. Abdul Aziz, Muhammad & Widodo, Tri, 2017. "Exchange Market Pressure: Evidences from ASEAN Inflation Targeting Countries," MPRA Paper 80919, University Library of Munich, Germany.
    5. M. Aslam Chaudhary & Ghulam Shabbir, 2004. "Macroeconomic Impacts of Monetary Variables on Pakistan’s Foreign Sector," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 9(1), pages 62-84, Jan-June.

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