On the relation between financial flows and the trade balance in developing countries
Using time-series annual data for a sample of developing countries, this paper investigates the empirical validity of theoretical predictions regarding determinants of fluctuations in the trade balance and financial flows. The motive is to see if standard conjectures about possible determinants have broad support across these countries. While the evidence provides some support to theoretical predictions, statistical significance appears limited. Given mixed results, a large component of fluctuations in the trade balance and financial flows appears to be random in developing countries. Such randomness limits the ability of policy makers to interpret cyclical variations in components of the balance of payments. Moreover, this randomness raises concerns about the sustainability of a widening trade deficit and sources of financing in many developing countries.
Volume (Year): 18 (2009)
Issue (Month): 3 ()
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