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Monetary Approach to Balance of Payments: A Case Study of India, 1968-85
Economic and Political Weekly
Vol. 24, No. 12 (Mar. 25, 1989), pp. 627-633+635-636
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4394570
Page Count: 9
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In this paper an attempt is made to test whether disequilibrium in the domestic money market exerts any influence on the balance of payments (BP). This has been done along the lines of 'monetary approach to the BP', as developed by Johnson , Mundell  and others. A comparison is made between elasticity approach and monetary approach in solving the BP problem. The reserve flow and sterilisation equations are estimated and the direction of causation between domestic credit and foreign exchange reserves is identified with Granger and Sims causality tests. The paper is divided into five sections. For the sake of completeness a brief outline of monetary approach to BP (MBOP) is given in Section I. Section II explains money demand equation, estimation of reserve flow and sterilisation equations. On the basis of money demand equation, monetary disequilibrium factor is worked out and the impact of this on trade, service and capital flows of the BP is tested in Section III. Dynamic simulation and the resultant multipliers are explained in Section IV followed by policy implications of this exercise in Section V.
Economic and Political Weekly © 1989 Economic and Political Weekly