Monetary approach to balance of payments : a case of Fiji

Abstract

Economists and policymakers have been increasingly preoccupied with the problems of inflation and balance of payments disequilibria since the early 1950s. Their preoccupation has led to new approaches to monetary analysis. In this period, a gradual evolution of a third major approach called the monetary approach to the balance of payments took place; the two best-known earlier approaches are the elasticity (neoclassical) approach and the income absorption (neo -Keynesian) approach. Each of the three approaches, as often pointed out could in principle produce the right answers if it were correctly applied. However, for applied research and background work for policy discussion on balance of payments problems. the monetary approach suggests itself as simpler and more manageable than the other approaches. It is based on the postulates of a stable demand function for money and of a stable process through which the money supply is generated. By focussing directly on the relevant monetary aggregates, this approach eliminates the intractable problems associated with the estimation of numerous elasticities of international transactions and of the parameters describing their interdependence, which are inherent in other approaches. This study therefore is concerned with testing the relevance of the monetary approach to the balance of payments problems in Fiji. It involves finding a stable demand for money function and then using it to estimate the desired demand for money in Fiji for the period of the study (1961 - 1984) . The analysis system developed, uses changes in desired demand for money and changes in domestic credit. If an increase ill desired demand for money is greater than an increase in domestic credit . then it is expected that there would be a positive change in international reserves, and if, on the other hand, changes in domestic credit is greater than changes in desired demand for money then a negative change in international reserves would be expected.