The effects of monetary policy on the balance of payments in Fiji

Abstract

There are different views in the literature as to causes of balance of payments disequilibria in developing economies. This article analyses the factors affecting the balance of payments in Fiji over the last twenty years or so, using a monetary model. The monetarist approach argues that domestic credit is the main cause and the cure of a nation?s balance of payments problems, as changes in the money supply are believed to be the primary determinant of changes in total nominal spending. The estimates obtained in this study are weak and that is not surprising, given that Fiji has structural problems and rigidities which do not fit well into the free-market situation of the monetarist theories. It seems plausible to believe that other ?structural factors? such as weather conditions and world market trends play an important role in affecting the balance of payments in Fiji, and it is suggested this should be an area for further research.