Abstract
Monetary approach to balance of payment establishes a link between foreign reserve assets and money supply. This link is important for managing balance of payment disequilibrium through adjustment of monetary aggregates. This study relies on the (Polak, 1957;1997) monetary model with data from 2007:Q1 to 2018:Q4 to examine the link between monetary factors and balance of payment in Nigeria. To circumvent simultaneity, the reduced form coefficients of the structural form of the Polak model are estimated using Two Stage Least Squares (TSLS) technique, while the structural parameters are recovered from the estimated reduced form coefficients. The results are enriching and robust. The Johansen cointegration procedure suggests a long run relationship among the macroeconomic variables in the balance of payment function. The estimated balance of payment model reveals that domestic credit is statistically significant and negatively related to foreign reserve assets, implying that balance of payment is a monetary phenomenon in Nigeria. The velocity of money circulation and the marginal propensity to import are approximately 120 percent and 14 percent, respectively. The study therefore recommends that the monetary authority should consider the use of domestic credit for management of balance of payment disequilibrium. It is also pertinent to increase domestic credit to grow the economy since such action will marginally decrease external reserve assets through increase in import, however, the net effect will enhance the overall economy.
Highlights
There has been a long-standing debate on the link between balance of payments and monetary variables in monetary and international economics literature
Other approaches to balance of payments management or adjustments exist - absorption and elasticities approaches (Salvatore, 2004), but monetary approach to balance of payment (MABOP) is becoming most appealing due to the inherent limitations of absorption and elasticities approaches in the management of balance of payments disequilibrium. These other approaches deal with the balance of payments problem through the current account of merchandise trade only, may not be the appropriate barometer for addressing balance of payment deficit. This current study focuses on the monetary approach to the balance of payments in Nigeria; as it looks beyond merchandise trade and incorporates the important role of financial assets (Melvin, 1992)
This study examines the validity of monetary approach to balance of payment as well as the implication of changes in domestic credit on overall economic activities and total import under the current monetary framework in Nigeria
Summary
There has been a long-standing debate on the link between balance of payments and monetary variables in monetary and international economics literature. Other approaches to balance of payments management or adjustments exist - absorption and elasticities approaches (Salvatore, 2004), but monetary approach to balance of payment (MABOP) is becoming most appealing due to the inherent limitations of absorption and elasticities approaches in the management of balance of payments disequilibrium. These other approaches deal with the balance of payments problem through the current account of merchandise trade only, may not be the appropriate barometer for addressing balance of payment deficit. This current study focuses on the monetary approach (modern approach) to the balance of payments in Nigeria; as it looks beyond merchandise trade and incorporates the important role of financial assets (Melvin, 1992)
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