Why Have Trade Balances Been Ignored as Sources of Monetary Efficiency?

Abstract

Studies of monetary efficiency have focused principally on output, inflation, unemployment and interest rates as sources of monetary efficiency. This study demonstrates trade balances outperform output, inflation, and unemployment rates as sources of monetary efficiency within domestic economies. Estimates of adjustment parameters show only trade balances generate positive adjustment parameters within cross-sections of sample countries. Given importance and relevance of trade balances are arrived at independent of effects of exchange rates or international trade, with sole focus on parameters of the domestic economy, empirical findings do not duplicate received importance of trade balances within context of management of currency exchange rates. Quite the contrary, trade balances are shown to be relevant and appropriate measures of economies' ability to manage overinvestments, equivalently, economies' ability to manage significant overshooting of domestic savings by investments. Given non-positive adjustment parameters are expected to induce monetary instability, empirical findings raise strong grounds for formal theoretical exploration of importance of trade balances as active sources of monetary efficiency within domestic economies.