THE MONETARY APPROACH TO THE BALANCE OF PAYMENTS: AN APPLICATION TO BARBADOS

Michael Howard () and Nlandu Mamingi
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Michael Howard: University of the West Indies, Cave Hill Campus, Barbados, P. O. Box 64, St. Michael, Barbados
Nlandu Mamingi: University of the West Indies, Cave Hill Campus, Barbados

The Singapore Economic Review (SER), 2002, vol. 47, issue 02, 213-228

Abstract: This paper examines the monetary approach to the balance of payments in Barbados, a small open economy with a fixed exchange rate system. We use an error correction mechanism (ECM) approach which shows that the monetary approach applies to Barbados. Such an ECM approach has not been previously employed in other related studies. Our analysis has implications for monetary policy since it confirms that excessive credit expansion leads to balance of payments deficits in fixed exchange rate systems, and the monetary authorities need to hold high levels of reserves in small open economy systems to protect the exchange rate.

Keywords: Money; Balance of payments; Foreign reserves; Cointegration; Error correction modelling (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1142/S0217590802000511

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