Test of Monetary Approach to Balance of Payments in West Africa Monetary Zone
Keywords:
Balance of Payment, Foreign Exchange, Monetary Approach, Current Account Deficit, Money Supply.
Abstract
This research tested the monetary approach to Balance of Payment in developing countries of West Africa in order to affirm whether the specified relationship in the approach depicts correctly the actual behaviour of the economies. Time series and cross-sectional data that ranges from 1970 – 2016 were used. The empirical results of the fixed effect model established a significant positive relationship between net domestic credit, interest rate and exports; an insignificant positive relationship between capital movements, imports, income and the dependent variable. Exchange rate, however, had a significant negative relationship with the net foreign assets, while inflation had an insignificant but negative relationship with net foreign assets. The pairwise causality tests indicated a unidirectional relationship between exchange rate, net domestic credit and net foreign assets while the other variables move independently and cannot granger cause net foreign assets. Hence, the study concludes that the Polak model is valid in the West Africa Monetary Zone despite the fact that they are no more operating a fixed exchange rate system. The study suggests that the attention of the monetary authorities and the governments should not only be on decreasing the money supply in the economy, since an increase in net domestic credits has a positive impact on the net foreign assets provided it is channeled towards domestic production.
References
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Adamu, P. A. (2004). The Dynamics of Balance of Payments Adjustment in Nigeria: An Error Correction approach. West African Financial and Economic Review, Econometrics, 3(2), 199 – 230.
Aghevli, B. B. (1977). The Monetary Approaches to the Balance of Payments Determination: An Empirical Test. International Monetary Fund Staff Papers, April (2), 275-290.
Ajayi, F. O. (2014). Determinants of Balance of Payments in Nigeria: A Partial Adjustment Analysis. Journal of African Macroeconomic Review, 5(1), 304-311.
Arewa, A. & Nwakamma, P. C. (2013). Money Supply and Velocity of Money in Nigeria: A Test of Polak Model. Journal of Management & Sustainability, 3(4), 136-150.
Akpasung, O. A. (2013). A Review of Empirical Literature on Balance of Payment as a Monetary Phenomenon. Journal of Emerging Trends in Economics and Management Sciences, 4(2), 124 – 132.
Braima, S. J. & Korsu, R. D (2013). Monetary Policy and the Balance of Payment: Econometric Evidence from Sierra Leonne. Journal of Sierra Leone Studies, 2(1). 1- 51.
Boateng, C. & Ayentimi, D. (2013). An Empirical Analysis of Balance of Payment in Ghana, using the Monetary Approach. European Journal of Business & Management, 5(8), 1-20.
Dhliwayo, R. (1996). The Balance of Payments as a Monetary Phenomenon: An Econometric Study of Zimbabwe Experience. African Econometric Research Consortium (AERC), 46, 1-36.
Duasa, J. (2005). The Malaysian Balance of Payment. Keynesian Approach versus Monetary Approach. International Islamic University, Malaysia Article, 1-15
Fleemuys, F. N. (2005). The Balance of Payment as a Monetary Phenomenon: An Econometric Study of Namibia. DEA Research Discussion Paper 72, 1 - 23
Frenkel, J. & Johnson, H.G. (1976). The Monetary Approach to the Balance of Payments: Essential Concepts and Historical Origin. In J Frenkel & H. Johnson, (Eds).The Monetary Approach to Balance of Payments, Toronto, University of Toronto Press.
Ho, W. S. (2005). Application of Polak and Keynesian Model to Macao’s economy. Macao Monetary Authority Publications, 89 – 108.
Ilesanmi, F. O. (2008). Monetary Approach to balance of payment. A test of Polak Model. Being a M. Sc. Thesis submitted to the Department of Banking and Finance, Ekiti State University.
Imoisi, A. I. (2012). Trends in Nigeria Balance Payment: An Empirical Analysis from 1970 -2010. European Journal of Business & Management, 4(21), 210 -217.
Imoughele, L. & Ismaila, M. (2015). Monetary Policy & Balance of Payment Stability in Nigeria. International Journal of Academic Research in Public Policy and Governance, 2(1), 1 – 15.
Iyoboyi, M. & Muftau, O. (2014). Impact of Exchange Rate Depreciation on the BOP: Empirical Evidence from Nigeria. Cogent Economics and Finance, 2, 1-23.
Johnson, H.G. (1972). The Monetary Approach to Balance of Payments Theory. Journal of Financial and Quantitative Analysis, 7(2), 1666-1672.
Johnson, H. G. (1976). The Monetary Approach to the Balance of Payments Theory. In J. Frenkel and H.G. Johnson (Eds). The Monetary Approach to the Balance of Payments, Toronto, University of Toronto Press.
Johnson, H. G. (1977). Monetary Approach to Balance of Payment Theory: Explanation and Policy Implication. Jstor Economica, 44(175), 217-229.
Khan, M. A. (2008). Long-run and Short-run Dynamics of Foreign Reserves and Domestic Credit in Pakistan. International Journal of Applied Econometrics and Quantitative Studies, 5(1).
Martin, R. (2014). The Problem of BOP Imbalances. KWF Economic Research, 1- 7.
Melink, H. A. (2003). Structural Adjustment Programmes on the African Continent: The Theoretical Foundation of IMF/ World Bank Reform Policies. African Study Centre Working Paper Series, (53), 1-30.
Musa, M. (1976). Tariff and the Balance of Payments: A Monetary Approach. In Frenkel, J and Johnson, H. G. (eds). The Monetary Approach to the Balance of Payments, Toronto, University of Toronto Press.
Nyong, M. O. & Obafemi, F. N. (1995). Exchange Rate Policy and Macroeconomic Adjustment in Nigeria: A Theoretical and Empirical Analysis with Policy Implication. Journal of Economics Studies 1(1), Department of Economics, University of Calabar.
Obioma, G. O. (1996). Balance of Payments and Foreign Reserves Management in Nigeria: Empirical Evidence from the Monetary Approach. NCEMA Policy Analysis Series, 4(2), Technical Guide. Journal of International Economics, 7, 251 -268.
Ogiogio, G. O. (1996). Exchange Rate Policy, Trade Policy Reform and the Balance of Payment. In Obadan, M. J. and Iyoha, M. A. (eds). Macroeconomic Policy Analysis: Tools, Techniques and applications to Nigeria. National Centre for Economic Management and Administration.
Ogiogio, T. M. (1996). Impact of External Sector Policies on Nigeria Economic Development. CBN Economic and Financial Review, 34(4).
Patrick, O. & Sher, V. (2007). Current Account Deficits in Sub-Saharan Africa: Do they matter? United Nations Economic Commission for Africa Conference Proceedings, 11(3), 241-257.
Polak, J. J. (1957). Monetary Analysis, Income Formation and Payments Problems. International Monetary Fund Staff Papers, 6(1), 1 -50.
Polak, J. J. (1997a). The International Monetary Fund Monetary Model. A Hardy Perrenial. Finance and Development, IMF.
Polak, J. J. (1997b). The IMF Monetary Model at Forty. International Monetary Fund Working Paper, WP/92/89.
Polak, J. J. (2001). Two Monetary Approach to the BOP: Keynesian and Johnsonian.
Shuaib, I. M., Augustine, O. E., & Ogedengbe, F. (2015). Balance of Payments: Nigerian Experience. British Journal of Economics, Management and Trade, 7(4), 296 - 305.
Stephen, K. & Njuyuna, N. (2000). Macro Models of the Keynesian Economy. A Review. Kenya Institute for Public Policy Research and Analysis Discussion Paper (2). 3 – 37.
Taiwo. (1992). An assessment of the Balance of Payment Crisis in Africa Using Bayesian Posterior Odds Ratio. The Nigerian Journal of Economic and Social Studies, 34(1), 31 – 40.
Tijani, O. J. (2014). Empirical Analysis of Balance of Payment Adjustment Mechanisms: Monetary Channel in Nigeria, 1970 – 2010. Mediterranean Journal of Social Sciences, 5(14), 67- 76.
Umoru, D. & Odjegba, O. (2013). Exchange Rate Misalignment and Balance of Payment Adjustment in Nigeria. European Scientific Journal, 9(13), 260- 274.
Umer, M., Muhammad, S. D., Abro, A. A., Sheikh, Q. A. & Ghazali, A. (2010). Balance of Payments as a Monetary Phenomenon: Econometric Evidence from Pakistan. International Research Journal of Finance and Economics.
WAMI. (2012). Inflation and Growth in the West African Monetary Zone: Evidence from a Threshold Analysis. West Africa Monetary Institute (WAMI) Occasional Paper Series 1, 2- 38.
Wiolletta, N. (2013). Development of the Polak Model. Wroclaw Review of Law, Administration & Economic Review, 18(1), 28-35.
Yotzov, V. (2001). Macroeconomic Models of the International Monetary Fund and the World Bank.(Analysis of Theoretical Approaches and Evaluation of their Effective Implementation in Bulgaria). National Bank of Bulgaria Discussion Paper, 14(2),6 –34.
Adamu, P. A. (2004). The Dynamics of Balance of Payments Adjustment in Nigeria: An Error Correction approach. West African Financial and Economic Review, Econometrics, 3(2), 199 – 230.
Aghevli, B. B. (1977). The Monetary Approaches to the Balance of Payments Determination: An Empirical Test. International Monetary Fund Staff Papers, April (2), 275-290.
Ajayi, F. O. (2014). Determinants of Balance of Payments in Nigeria: A Partial Adjustment Analysis. Journal of African Macroeconomic Review, 5(1), 304-311.
Arewa, A. & Nwakamma, P. C. (2013). Money Supply and Velocity of Money in Nigeria: A Test of Polak Model. Journal of Management & Sustainability, 3(4), 136-150.
Akpasung, O. A. (2013). A Review of Empirical Literature on Balance of Payment as a Monetary Phenomenon. Journal of Emerging Trends in Economics and Management Sciences, 4(2), 124 – 132.
Braima, S. J. & Korsu, R. D (2013). Monetary Policy and the Balance of Payment: Econometric Evidence from Sierra Leonne. Journal of Sierra Leone Studies, 2(1). 1- 51.
Boateng, C. & Ayentimi, D. (2013). An Empirical Analysis of Balance of Payment in Ghana, using the Monetary Approach. European Journal of Business & Management, 5(8), 1-20.
Dhliwayo, R. (1996). The Balance of Payments as a Monetary Phenomenon: An Econometric Study of Zimbabwe Experience. African Econometric Research Consortium (AERC), 46, 1-36.
Duasa, J. (2005). The Malaysian Balance of Payment. Keynesian Approach versus Monetary Approach. International Islamic University, Malaysia Article, 1-15
Fleemuys, F. N. (2005). The Balance of Payment as a Monetary Phenomenon: An Econometric Study of Namibia. DEA Research Discussion Paper 72, 1 - 23
Frenkel, J. & Johnson, H.G. (1976). The Monetary Approach to the Balance of Payments: Essential Concepts and Historical Origin. In J Frenkel & H. Johnson, (Eds).The Monetary Approach to Balance of Payments, Toronto, University of Toronto Press.
Ho, W. S. (2005). Application of Polak and Keynesian Model to Macao’s economy. Macao Monetary Authority Publications, 89 – 108.
Ilesanmi, F. O. (2008). Monetary Approach to balance of payment. A test of Polak Model. Being a M. Sc. Thesis submitted to the Department of Banking and Finance, Ekiti State University.
Imoisi, A. I. (2012). Trends in Nigeria Balance Payment: An Empirical Analysis from 1970 -2010. European Journal of Business & Management, 4(21), 210 -217.
Imoughele, L. & Ismaila, M. (2015). Monetary Policy & Balance of Payment Stability in Nigeria. International Journal of Academic Research in Public Policy and Governance, 2(1), 1 – 15.
Iyoboyi, M. & Muftau, O. (2014). Impact of Exchange Rate Depreciation on the BOP: Empirical Evidence from Nigeria. Cogent Economics and Finance, 2, 1-23.
Johnson, H.G. (1972). The Monetary Approach to Balance of Payments Theory. Journal of Financial and Quantitative Analysis, 7(2), 1666-1672.
Johnson, H. G. (1976). The Monetary Approach to the Balance of Payments Theory. In J. Frenkel and H.G. Johnson (Eds). The Monetary Approach to the Balance of Payments, Toronto, University of Toronto Press.
Johnson, H. G. (1977). Monetary Approach to Balance of Payment Theory: Explanation and Policy Implication. Jstor Economica, 44(175), 217-229.
Khan, M. A. (2008). Long-run and Short-run Dynamics of Foreign Reserves and Domestic Credit in Pakistan. International Journal of Applied Econometrics and Quantitative Studies, 5(1).
Martin, R. (2014). The Problem of BOP Imbalances. KWF Economic Research, 1- 7.
Melink, H. A. (2003). Structural Adjustment Programmes on the African Continent: The Theoretical Foundation of IMF/ World Bank Reform Policies. African Study Centre Working Paper Series, (53), 1-30.
Musa, M. (1976). Tariff and the Balance of Payments: A Monetary Approach. In Frenkel, J and Johnson, H. G. (eds). The Monetary Approach to the Balance of Payments, Toronto, University of Toronto Press.
Nyong, M. O. & Obafemi, F. N. (1995). Exchange Rate Policy and Macroeconomic Adjustment in Nigeria: A Theoretical and Empirical Analysis with Policy Implication. Journal of Economics Studies 1(1), Department of Economics, University of Calabar.
Obioma, G. O. (1996). Balance of Payments and Foreign Reserves Management in Nigeria: Empirical Evidence from the Monetary Approach. NCEMA Policy Analysis Series, 4(2), Technical Guide. Journal of International Economics, 7, 251 -268.
Ogiogio, G. O. (1996). Exchange Rate Policy, Trade Policy Reform and the Balance of Payment. In Obadan, M. J. and Iyoha, M. A. (eds). Macroeconomic Policy Analysis: Tools, Techniques and applications to Nigeria. National Centre for Economic Management and Administration.
Ogiogio, T. M. (1996). Impact of External Sector Policies on Nigeria Economic Development. CBN Economic and Financial Review, 34(4).
Patrick, O. & Sher, V. (2007). Current Account Deficits in Sub-Saharan Africa: Do they matter? United Nations Economic Commission for Africa Conference Proceedings, 11(3), 241-257.
Polak, J. J. (1957). Monetary Analysis, Income Formation and Payments Problems. International Monetary Fund Staff Papers, 6(1), 1 -50.
Polak, J. J. (1997a). The International Monetary Fund Monetary Model. A Hardy Perrenial. Finance and Development, IMF.
Polak, J. J. (1997b). The IMF Monetary Model at Forty. International Monetary Fund Working Paper, WP/92/89.
Polak, J. J. (2001). Two Monetary Approach to the BOP: Keynesian and Johnsonian.
Shuaib, I. M., Augustine, O. E., & Ogedengbe, F. (2015). Balance of Payments: Nigerian Experience. British Journal of Economics, Management and Trade, 7(4), 296 - 305.
Stephen, K. & Njuyuna, N. (2000). Macro Models of the Keynesian Economy. A Review. Kenya Institute for Public Policy Research and Analysis Discussion Paper (2). 3 – 37.
Taiwo. (1992). An assessment of the Balance of Payment Crisis in Africa Using Bayesian Posterior Odds Ratio. The Nigerian Journal of Economic and Social Studies, 34(1), 31 – 40.
Tijani, O. J. (2014). Empirical Analysis of Balance of Payment Adjustment Mechanisms: Monetary Channel in Nigeria, 1970 – 2010. Mediterranean Journal of Social Sciences, 5(14), 67- 76.
Umoru, D. & Odjegba, O. (2013). Exchange Rate Misalignment and Balance of Payment Adjustment in Nigeria. European Scientific Journal, 9(13), 260- 274.
Umer, M., Muhammad, S. D., Abro, A. A., Sheikh, Q. A. & Ghazali, A. (2010). Balance of Payments as a Monetary Phenomenon: Econometric Evidence from Pakistan. International Research Journal of Finance and Economics.
WAMI. (2012). Inflation and Growth in the West African Monetary Zone: Evidence from a Threshold Analysis. West Africa Monetary Institute (WAMI) Occasional Paper Series 1, 2- 38.
Wiolletta, N. (2013). Development of the Polak Model. Wroclaw Review of Law, Administration & Economic Review, 18(1), 28-35.
Yotzov, V. (2001). Macroeconomic Models of the International Monetary Fund and the World Bank.(Analysis of Theoretical Approaches and Evaluation of their Effective Implementation in Bulgaria). National Bank of Bulgaria Discussion Paper, 14(2),6 –34.
Published
2020-05-18
How to Cite
Oluwole, F. O., & Oloyede, J. A. (2020). Test of Monetary Approach to Balance of Payments in West Africa Monetary Zone. Australian Finance & Banking Review, 4(1), 9-17. https://doi.org/10.46281/afbr.v4i1.578
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Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
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