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THE MONETARY APPROACH OF THE BALANCE OF PAYMENTS: EMPIRICAL EVIDENCES FROM EMERGING MARKETS
Abstract. A country’s balance of payments expresses the equilibrium between international commercial and financial inflows and outflows. In an increasingly globalized world, the (dis)equilibrium of such balance could have a significant impact on macroeconomic stability. Deficits or surpluses of different accounts from the balance of payments could have an impact on the exchange rate and the interest rate. The economic theory developed several approaches regarding the equilibrium of the balance of payments and specific public policies are used in this respect (tariff and non-tariff barriers, stimulus for exporting companies, subsidies, promoting activities for FDIs, improvement of country image etc.). One of the most sensitive problems in this matter of balance of payments’ equilibrium is the manipulation of exchange rate (a depreciated currency is submitted to increase exports). This paper will present the two most important approaches in this field: elasticity approach and absorption approach and will provide a critical perspective on both theories. The assumptions of these approaches will be tested on the case of emerging markets (from Eastern and Southern Europe, Eastern and Southern Asia and Latin America) using panel regression methodology. The results will be very conclusive for the effectiveness of such using of depreciation or appreciation of local currency as a tool for temporarily improving the international position of emerging countries.
Key Words: balance of payments, elasticity approach, J-curve effect.