The Monetary Approach to Balance of Payments: A Review of the Seminal Short-Run Empirical Research (Economics ARTICLES‪)‬

INTRODUCTION This paper provides a review of the seminal short-run empirical research on the monetary approach to the balance of payments with a comprehensive reference guide to the literature. The paper reviews the three major alternative theories of balance of payments adjustments. These theories are the elasticities and absorption approaches (associated with Keynesian theory), and the monetary approach. In the elasticities and absorption approaches the focus of attention is on the trade balance with unemployed resources. The elasticities approach emphasizes the role of the relative prices (or exchange rate) in balance of payments adjustments by considering imports and exports as being dependent on relative prices (through the exchange rate). The absorption approach emphasizes the role of income (or expenditure) in balance of payments adjustments by considering the change in expenditure relative to income resulting from a change in exports and/or imports. In the monetary approach, on the other hand, the focus of attention is on the balance of payments (or the money account) with full employment. The monetary approach emphasizes the role of the demand for and supply of money in the economy. The paper focuses on the monetary approach to balance of payments and reviews the seminal short-run empirical work on the monetary approach to balance of payments. Due to space limitation the seminal long-run empirical work on the monetary approach to balance of payments is reviewed in another paper. Throughout, the paper provides a comprehensive set of references corresponding to each point discussed. Together, these references exhaust the existing short-run research on the monetary approach to balance of payments.