Test of Monetary Approach to Balance of Payments in West Africa Monetary Zone

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.

Balance of Payments as a Monetary Phenomenon: An ARDL Bounds Test Method for Algeria

“…This finding is consistent with previous studies by (Al-Basheer, Malawi, 2016;Chaudhary, Shabbir, 2004). On the other hand, inflation has a negative impact on net foreign assets in the long run, with a 1% rise in inflation leading to a 0.389% decline in net foreign assets at the 1% significance level, which are in line with the results of (Oluwole, Oloyede, 2020;Senyefia et al, 2019). The study also found that interest rates have an inverse relationship with net foreign assets, with a 1% increase in interest rate reducing net foreign assets by 0.384% at the 10% significance level, which is consistent with the findings of (Chaudhary, Shabbir, 2004).…”