The Malaysian Balance of Payments:Keynesian Approach Versus Monetary Approach
There are two competing theories of balance of payments: the Keynesian and the monetary theories. Each of the two approaches provides distinct explanations on how the determinants of the balance of payments could lead to equilibrium and disequilibrium of the balance of payments account and both theories also rank differently the importance of real/merchandise account and monetary/official reserve transactions balance account of the balance of payments. The paper aims to examine the two theories on Malaysian balance of payments based on two tests: test of correctness of signs of regressors and test of speed adjustment. The results show that signs of regressors of the Trade Balance (TB) equation support the Keynesian view while signs of regressors of the Official Reserve Transactions Balance (ORTB) equation support both Keynesian and Monetary views. It is also found that the ORTB dominates the TB in terms of quickness of adjustment, so the ORTB is an autonomous account and the TB is an accommodating accoun
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