Balance Of Payments Problems Research Articles

How did the IMF evolve into a policy advisor? Shaping the conditional lending practice

ABSTRACT The International Monetary Fund (IMF or the Fund) is an organization responsible for stabilizing the international monetary system. To this end, the IMF manages its members’ balance of payments problems by providing conditional loans. Through conditionality, the IMF monitors national economic policies. This study examines the historical origins of IMF conditionality, focusing on the Fund’s human capital: (1) specialized knowledge to examine members’ problems and design corrective measures, and (2) ability to consult with borrowers. The findings are as follows: (1) the Fund’s Research Department staff developed adjustment theories that became a key component of IMF conditionality; (2) the Managing Directors introduced the practice of conditional lending driven by bureaucratic motivation for the Fund’s organizational prosperity; (3) the Fund’s staff reviewed lending procedures through annual consultations; and (4) the Fund’s human capital played a key role in shaping the practical basis of IMF conditionality. Most related research has emphasized the influence of the United States on IMF conditionality. This study, however, shows that the U.S. could not create conditionality without the participation of the IMF’s staff. The results of this study offer a new insight into the debate on financial oversight from an international perspective.

COVID-19 effects and home-grown policy response in Sri Lanka

The paper examines the fascinating case of middle-income Sri Lanka with pre-existing macroeconomic weaknesses hit by COVID-19. The pandemic created a public health emergency and an economic crisis in 2020, causing economic damage and dampening Sri Lanka’s development prospects. The evidence shows a sudden growth contraction, a steep rise in poverty, falling women’s employment, worsening macroeconomic imbalances, and high external debt levels rising. Rather than requesting early IMF assistance for its balance of payments problems, President Gotabaya Rajapaksa’s government opted for home-grown remedies including ultra-loose monetary policy, import controls, bilateral swaps and loans, and a ban on fertilizer imports. The unconventional policy mix temporarily mitigated economic scaring from COVID-19 and supported the economy. But the distortions introduced by prolonging this unconventional mix and the Russia-Ukraine conflict shock pushed Sri Lankan economy into external debt default, a worsening economic crisis and Rajapaksa’s resignation in 2022.

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

Abstract Research background Every country attempts to improve its balance of payments (BOP) position to enhance macroeconomic policy. Algeria, like many developing countries, is experiencing a BOP deficit. This raises concerns about the reasons for this deficit and prioritizes the quest for potential answers. Purpose In the context of the Monetary Approach to the balance of payments (MABP), this paper investigates the long-run relationship between domestic credit, inflation, interest rate, GDP, and net foreign assets to find whether BOP is a monetary phenomenon in Algeria from 1980 to 2019. Research methodology: The Autoregressive Distributed Lag (ARDL) bounds test, combined with the critical approximation p-values of Kripfganz and Schneider (2020), has been applied. Results The findings clearly showed a long-run relationship among the variables. The long-run estimates strongly supported MABP propositions, and domestic credit had a negative and statistically significant influence on net foreign assets. This suggests that Algeria’s BOP is a monetary phenomenon, and excess money supply played a crucial role in Algeria’s balance of payments disequilibrium. Novelty The contribution of this paper is the use of the ARDL bounds test in combination with the novel critical approximation p-values of Kripfganz and Schneider (2020), which provided more robust results. This study could help monetary authorities to elaborate the suitable policies in dealing with BOP problems in Algeria.

Crude Oil Price, Monetary Policy and Output: The Case of Pakistan

Rapid rises in the prices of crude oil in the decade of 2000s have raised concerns among policy-makers around the world, as the theoretical and empirical literature has established that oil price shocks may have an adverse impact on the macro economy of the country. In particular, for the oil importing developing countries like Pakistan, this upward trend in the price of oil can have serious repercussions in terms of creating inflationary pressures in the economy, increasing budget deficit and balance of payment problems, and thus affecting the GDP growth. Pakistan was on the path of rising GDP growth in the first seven years of this decade. But in the year 2007-08, the situation has changed. This oil price shock could possibly be one of the reasons. As an impact of rising growth rate of GDP, demand for energy has also gone up rapidly in this period. In the energy mix for the year 2005-06, oil accounts for 32 percent of the total energy used in Pakistan, and it is the second largest source of energy used after natural gas, which accounts for 39 percent. With oil being the second largest source of energy used along with almost constant rate of its production Pakistan is heavily dependent on oil imports from Middle East exporters (Saudi Arab playing the lead role). Almost 82 percent of the demand for petroleum products in the country is met through imports.1 Pakistan spent about 44 percent of export earnings on oil imports in 2006-07. This percentage was only 27 percent in 2004-05. Therefore, the international oil price increase has a direct impact on the macro economy of the country, especially on the oil price GDP relationship. The share of net oil imports in GDP is an indicator of the relative importance of the oil price rise to the economy in terms of the potential adjustments needed to offset it. For Pakistan over the last few years, this ratio has risen from 3.13 in 1990-91 to -5.24 in 2005-06 [Malik (2007)]. With such a high ratio, unless country is running in surplus, or has extremely large foreign exchange reserves, high oil price is dealt by severe macro economic adjustments.

Forecasting Value at Risk and Expected Shortfall of Foreign Exchange Rate Volatility of Major African Currencies via GARCH and Dynamic Conditional Correlation Analysis.

Research on the exchange rate volatility and dynamic conditional correlation of African currencies/financial markets interdependence appears to be limited. In this paper, we employ GARCH models to characterize the exchange rate volatility of eight major African currencies. The variation of interdependence with respect to time is described using the DCC-GARCH model. From the results of the DCC, remarkable variations in correlations through time across these countries are observed with the correlations varying from low to moderate, suggesting that African economies are generally governed by certain economic factors and are vastly regulated. These regulations, including exchange rate misalignment led to sluggish and negative growth in most of the African countries. For instance, persistent misalignment can cause high levels of inflation, for example, undervaluation. Overvaluation can lead to trade imbalances and they can in turn create macroeconomic instability and balance of payment problems. Given these results, we suggest that policy makers should revamp and adopt state resilience so as to reduce the negative effect of exchange rate misalignment on economic growth.

The Dynamics of Inflation in Ethiopia: Time Series Approach

One of the prime objectives of governments is achieving stable macroeconomic condition. This objective requires that prices be kept to a reasonably stable level. High and persistent inflation introduces uncertainties into the economy and may lead to slowdown of economic growth by discouraging domestic as well as foreign investments. It may also cause balance of payments problems by eroding a country’s competitive advantage. Moreover, because it hits the poor the most it needs to be tackled. This study aims at understanding the forces behind the current inflationary process in Ethiopia. In order to achieve the stated objective a synthesis model of monetarist and cost-push inflation theories is estimated using vector autoregressive (VAR) and single equation error correction models. The estimated models enable to understand the short run and the long run inflation dynamics in Ethiopia between 1980 and 2017.The result shows that in the long run real money supply. Real GDP growth real effective exchange rate and Budget deficit have significantly affect inflation. But budget deficit and real GDP is not found the expected sign rather. The short run the change in real GDP growth and change real money supply significantly affect inflation. However the change real effective exchange rate and budget deficit are insignificant. The study suggests that adopting restrictive monetary and fiscal policy. Have essential tools to curb inflationary problem of Ethiopia. Keywords: inflation, ECM,GDP,VAR DOI: 10.7176/JESD/11-11-01 Publication date: June 30th 2020

Privatization Experience and the Jordanian Economy

DOI: 10.7176/JESD/10-1-08 The wave of privatization began to sweep the world during the second half of the ninth decade of the twentieth century; England was one of the first countries that preceded it, followed by other developed countries such as France, Italy, Spain, Canada and others. Privatization has moved to developing countries such as Argentina, Brazil, Chile, Bangladesh, Pakistan, Turkey, Nigeria, Egypt, Jordan and others. The former socialist countries also began to adopt privatization programs such as the Soviet Union, Czech Republic, Slovakia, Poland, Hungary and others. This trend emerged as a result of the conditions set by the International Monetary Fund and the Bank the run-up to the rescheduling of its debts in accordance with the known rules of the Paris Club and the London Club, where the thought of these two institutions is based on the following analysis: [1] In order for these countries to avoid the difficulties of servicing their debts and their balance of payments problems, they need to restructure their economies so that they can improve the efficiency and allocate their resources, with a structural adjustment program; privatization comes from its most important components. [2] World Bank experts believe that the policy of privatization needs to develop a program that starts a full survey of public sector projects and its problems, and classification of these projects according to their situation, and then identify projects to be privatized, with the establishment of the basis for evaluating the assets of the sold companies, and set a schedule that sets sales payments, and the establishment of a special body responsible for the privatization program. [3] The Bank does not object to providing financial and technical support for the development and implementation of this program, the success of the program requires that the government of the state create an environment that will revive the market economy, such as: [4] Edit prices, especially exchange rate, interest rate. Liberalization of foreign trade. Changing the laws regulating public sector companies. The return and development of the stock exchange. As for Jordan, the process of privatization began Jordan 1992 with the implementation of the economic reform program cooperation with the International Monetary Fund, which ended 1998 and was extended three times until the end of the middle of 2004 but the pain of Jordan 2009 of the impact of the global crisis and the resorting a large numbers 2004 from Iraq and 2012 and 2013 because of the Syrian crisis made it difficult for them to continue without resorting to the Bank and asked for loans from him and with each new loan required the lender for further reforms, including privatization, such operations will continue, including economic reform programs, within the framework of this program, a number of public companies and state-owned enterprises have been privatized or which the State has a large share. [1] See Reham Abdelmatti, Privatization and Economic Transformation Egypt, Al Mahrousa Research and Publishing Center, Cairo, 1997, pp. 40,39. [2] Mahmoud Sobh, Privatization to Meet Survival Requirements and Growth Challenges, Ain Shams University, Cairo, 1995, p.15 [3] Mahmoud Sobh, op. Cit., P. 15, 16. [4] Jamal Mahmoud al-Kurdi, Legal Regulation of Privatization, Dar al-Nahda al-Arabiya, Cairo, 1998, p.11

India's Commodity Trade with Saudi Arabia: A Panel Data Approach

The discovery, production, and exploration of the petroleum crude oil in Saudi Arabia and Gulf region increased the significance of this region in the world. India relies heavily on petroleum crude oil imports from Saudi Arabia. Economies from Gulf Cooperation Council (GCC) countries especially Saudi Arabia is the largest supplier of petroleum oil and gas to Indian Economy. This is the only import commodity that is the most important constituent of the economic cooperation between India and Saudi Arabia. Countries of WestAsia are the largest trading partner of India as compared to any other trading block or grouping at the world level. Further, trade size between India and Saudi Arabia observed an exponential growth during the study period. India's imports of petroleum oil are an important issue as Saudi Arabia is the main supplier of India's petroleum imports. Further, Saudi Arabia and other Gulf countries are the main destinations for Indian expatriate workforce for employment. Therefore, Saudi Arabia plays an important role in solving the problems of unemployment and balance of payments problems in India. We will discuss the subject matter for ten years of data from 2005 to 2015.

Mortgage Credit: Denmark’s Financial Capacity Building Regime

ABSTRACTThe integration of small states into the international financial system has constrained their ability to enact the traditional macroeconomic tools of fiscal and monetary policy. As systems of mortgage credit are tightly integrated into global capital markets and influence flows of capital between states, this paper uses Denmark as a case study to explore whether domestic mortgage sector reforms have been used to build financial capacity to compensate for the loss of economic policy autonomy. The results of this analysis suggest that the Danish government has actively used mortgage credit to meet three specific macroeconomic objectives since the 1980s: (1) mortgage credit was restricted in the 1980s to resolve Denmark's persistent balance of payments problem; (2) liberalisations of mortgage credit in the 1990s and 2000s allowed the Danish government to stimulate the economy via privatised/house-price Keynesianism and reduce their sovereign debt burden; and (3) mortgage credit has been used as a form of privatised monetary policy, allowing Denmark to break-free from the ‘iron-cage’ of the Mundell-Fleming trilemma. It is in these specific ways that the Danish government has used mortgage reforms to achieve macroeconomic policy autonomy and navigate economic challenges whilst adhering to the constraints of the international financial system.

The Dilemma of Trade and the Nexus of Benefits and Costs (Trade or No Trade)

Many economists and governments are now of the view that promoting trade in general and exports, in particular, are the solution to poverty reduction and balance of payment problems and eventual development. In the modern era, most economies have adopted the theory of comparative and specializing in goods for which they have comparative advantage and trading for much needed foreign exchange earnings. While most studies have evaluated the impact and benefits of international trade, few have focused on the costs associated with the trade. This paper reviews both benefits and costs associated with trade, in order to strike a balance and provide a complete overview of trade for, especially developing economies. A model of cost and benefit analysis of trade (MCBAT) is subsequently developed. In order to achieve the objectives of the study, the paper uses an empirical method of study and uses empirical data for costs and Granger causality tests, error correction models, Least squares (Gauss-Newton / Marquardt steps) and Wald tests in Eviews statistical software to determine impact. Theoretical and empirical analysis prove that has both benefits and costs, and whilst trade provides quality, cheaper and variety of goods, and may promote economic growth, it may harm developing economies in terms of deficit balance of payments and debts, resource depletion and domestic industries.

Territoriality and the Original Intent of Subpart F

On April 26, 2017, President Trump issued a one-page tax reform outline that included “territoriality,” i.e., exempting from tax dividends from the non-Subpart F income of controlled foreign corporations. Territoriality is also included in the House GOP “Better Way” Blueprint and was supported by the Obama Administration and in bipartisan legislation introduced in 2016 by Senators Rob Portman (R-OH) and Chuck Schumer (D-NY). Thus, of all the current tax reform proposals, it may have the best chance of being enacted, especially given that it is linked with imposing some tax on the past offshore earnings of US multinationals. In the course of investigating the Stanley Surrey papers at the Harvard Law School Library, I discovered an interesting document that can shed some light on the “original intent” of Subpart F and its relation to territoriality. The document shows that in Surrey’s view, the purpose of Subpart F was primarily to prevent shifting of profits from the US to low-tax foreign jurisdictions such as Switzerland. This task is needed to achieve CEN, protect the gold reserves in Fort Knox, and prevent non-taxation of US source income. The emphasis throughout is on the low tax level in the foreign country, because in the absence of such a low tax level, deferral does not confer meaningful tax benefits, and does not violate CEN, create balance of payments problems, or induce base erosion and profit shifting out of the US. Territoriality would exacerbate the profit-shifting problem by lifting the only current constraint on it, which is the difficulty of repatriating the offshore income. Surrey would be appalled at the current ability of Apple, Amazon, Google, Facebook and Microsoft to do exactly what he opposed in 1961, namely “license United States created patents and know-how” from tax haven CFCs without triggering US tax. Ideally, we should go back to the drawing board and adopt Surrey’s original 1961 proposal to abolish deferral. But since that seems politically impossible (even though the president proposed it during his campaign), we should at least do what every other OECD country that has CFC rules has done- combine territoriality with a strong minimum tax provision, either explicitly or by listing certain countries as tax havens. That, and not the current territoriality proposals, would “level the playing field” between US and foreign multinationals.

Exchange Rate Behavior in Ghana: Is there a Misalignment?

Exchange rate misalignment results in resource misallocation and could hamper overall economic growth. Persistent undervaluation leads to high levels of inflation which in turn creates macroeconomic instability while overvaluation leads to trade imbalances with consequential balance of payment problems. Since the redenomination exercise in 2007, the Ghana cedi has been consistently depreciating. This has sparked a lot debate in the public media and among academics concerning possible misalignment of the cedi. This paper investigates the behaviour of the Ghanaian cedi using the behavioral equilibrium exchange rate approach for the period 1980Q1 to 2013Q4. The Johansen cointegration and error correction modelling framework is employed in estimating a model of the real effective exchange rate. Unlike previous studies, this paper employs the real effective exchange rate computed by authors due to certain adjustments made in the International Monetary Fund, International Financial Statistics series. The results point to significant misalignment of the exchange rate with undervaluation before the redenomination in 2007 and overvaluation afterwards. The empirical finding of this study has implications for policy direction. Monetary authorities should seek to strike a balance between the two extremes of overvaluation and undervaluation. This may be achieved by pursuing a pure floating exchange rate system where the exchange rate is allowed to follow the path dictated purely by market forces, without any intervention by the Central Bank. Alternatively, a properly managed float system of exchange rates may be pursued. Hence, given the current state of overvaluation, a once-off devaluation of a minimum of 20% could be considered to bring the exchange rate close to its equilibrium. Subsequently, monetary authorities should closely monitor deviations from the equilibrium path and engage in timely interventions. In addition, policy should be directed at strengthening the economy’s fundamentals with particular attention to the export and productive sectors by creating a conducive business environment that promotes private investment and supports the production of high quality goods of international standard both for the external and domestic market.

Making Space for Sanctions: The Economics of German Natural Gas Imports from Russia, 1982 and 2014 Compared

This article explores the economic context behind Germany’s decision to impose sanctions on Russia in 2014 in response to the Ukraine crisis, through the lens of energy and natural gas. It does so by comparing 2014 with another moment in German-Russian relations when questions of energy, economics, sanctions, and transatlantic politics converged—the Yamal natural gas pipeline in 1982. Then, West Germany had little economic latitude to disrupt trade with Russia because of its high unemployment rate, its balance of payments problems, and the large investments major German corporations had made in Yamal. Consequently, Bonn broke with the United States over the question of sanctions. In 2014, by contrast, Germany’s strong economy, robust balance of payments, and the absence of a united business front opposing sanctions gave Berlin the space to pursue a non-economic agenda and support the United States in imposing sanctions. The article concludes that these cases illustrate how Germany should not be characterized as a “geo-economic power,” insofar as Berlin still has the space to prioritize goals such as the advancement of democracy and human rights over its need to promote exports and secure imports of raw materials.

Modelling and Prognosis of the Export of the Republic of Serbia by Using Seasonal Holt-Winters and Arima Method

Abstract Low labour costs as one of the key sources of export stimulation, the competitive advantage of domestic agricultural production and bilateral agreements with partner countries - all promote export as a potentially significant factor of encouragement of economic development of the Republic of Serbia.Taking into account this fact, on the one hand, and balance of payments problems that Serbia has been facing over the years, on the other hand, the subject of this paper is an analysis of trends in the Republic of Serbia export and explanation of variations in the export trends during the period from 2004 to 2014. The aim of the paper is to explore export trends forecast from January to December 2015.The analysis uses Holt-Winters and ARIMA methods for analyszing time series.The paper provides insight into the export trend forecasts for the period of 12 months, and thus confirms the possibility of practical usage of the time series analysis methods in forecasting macroeconomic variables such as export. The used methods identify increase of export during the summer and its decrease after October 2015. The paper establishes the existence of a high degree of congruence between forecasts obtained by using two methods, which confirm a high quality of the elaborated methods in the analysis of exports.

債権国主導による世界経済ガヴァナンス改革

Since the inception of floating exchange rates among the major countries at the beginning of 1970s, the frequency of occurrence in economic crisis has increased tremendously. That is why the world economy has been conducted by the debtor’s logic not by the creditor’s one, in addition to fundamental unstableness of the world economy by the large swings of the exchange rates. Under the fixed exchange rate regime, the strong balance of payments discipline is imposed on the deficit countries (debtors) . In this sense fixed exchange rate regime is the system conducted by the creditor’s logic. On the other hand, floating exchange rates is the system conducted by the debtor’s logic. This system could never work well. If we look at the European sovereign debt crisis in Greece and Portugal, the root cause is each country’s balance of payments problem although it appears fiscal problem on the surface. They continued huge current account deficits of around 10 % of their GDP for more than 10 years, because their balance of payments discipline was completely disappeared since the introduction the euro. This is more than outrageous. This could make possible for them to keep huge fiscal deficit which is a part of current account of balance of payments. Moreover, the two countries disguised their fiscal balance statistics for many years. After all, balance of payments on current account is one of the most important macro-economic indicators under any currency system including even floating exchange rates. This should be clearly recognized in all countries in the world. Credit rating agencies like Standard & Poor’s and Moody’s repeatedly made mistakes in every major crisis, such as Asian Currency Crisis in 1997, Enron Corp. collapse in 2001, Worldcom collapse in 2002, and US Sub-prime Housing Loan Crisis in 2007. This is due to the system based on issuer-pays model or debtor-pays model which brings conflict of interest. Thus the current world economic system is basically constructed by the debtor’s logic. That is the fundamental reason why we would encounter economic and financial crises very frequently. And, we should pay attention to the fact that the United States and the United Kingdom obviously had much more banking crises than other major countries for the past 200 years. Economies conducted by freemarketeers’ mantra are prone to face economic crises. The solution to the world economy is that countries should follow the Germano-Japanese economic model rather than the Anglo-Saxon model. In other words, we should re-construct the world economic system conducted by the creditor’s logic. Japan has been the largest net external creditor for 22 years since 1991, and Germany is the third largest net external creditor only after China.

Un Fondo de Reservas Regional para América Latina (A Regional Reserve Fund for Latin America)

This paper analizes and presents empirical evidence on the feasibility, implications and challenges of an expansion of the Latin American Reserve Fund (FLAR) to cover twelve countries (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Costa Rica, Mexico, Peru, Paraguay, Uruguay and Venezuela). The paper argues that a regional reserve fund for these twelve countries should not be conceived as a unique line of defense but rather as part of a wider set of support mechanisms to which countries may resort to confront Balance of Payments difficulties. In order to estimate the possible size of a Fund for the twelve countries, we begin from the premise that regional reserve funds are one of the various mechanisms of the international financial architecture. As a result the size of Fund can be smaller than one built on the idea of a lender of last resort to all its members. In this sense the Fund should not necessarily cover extreme scenarios such as systemic crises or generalized contagion. It should be calibrated to cover the most likely scenarios (according to our results those in which only a fraction of members present simultaneous Balance of Payments problems). A fund calibrated to cover the most likely scenarios is within manageable ranges – between 9 and 10 billion dollars, representing on average between 1.4% and 1.7% of countries’ international reserves – depending on the scenario considered. A Fund of this size could cover a significant share of potential financing requirements of members but, in case of necessity, it should have the capacity to enlarge its pool of resources through other mechanisms of the international financial architecture. One of the main challenges of an extended fund is to reconcile the sense of ownership felt by member states and flexible/timely liquidity allocation with sound surveillance and participative decision making.

Currency crisis transmission through international trade

The Eurozone recent crisis has shown how balance of payments problems in less developed European Monetary Union (EMU) member countries can affect EMU trading partners, spreading the crisis to a larger group of countries. This paper introduces a three-country dynamic general equilibrium model to analyze whether and how terms of trade effects can generate a spillover effect or a currency crisis transmission between countries. Specifically, using a two period model, it incorporates world market clearing conditions for tradables into a new theoretic model, analyzes net capital flow movements between countries, and establishes cross-border macroeconomic linkages. This paper shows how a currency crisis can transmit through the real (trade) sector channel of the economy.

Fritz Machlup and the Bellagio Group: Strategy and Organization in an Early NGO

Economist Fritz Machlup, the mentor and teacher of Edith Penrose, applied an opportunity cost-focused approach to the strategy and organization of his NGO for world monetary system reform. The NGO was the Bellagio Group, formed by Machlup and partners Robert Triffin and William Fellner to understand and solve the problems facing the world monetary system from the late 1950s through the 1970s. This story has been largely untold. This paper examines Fritz Machlup’s intellectual background, his understanding of opportunity costs and now they figure in his model of strategic change as well as his use of scenarios and framing to galvanize thinking and group action at the Bellagio Group conferences. Further, the paper probes the identity and background of the “team of rivals,” the so-called nongovernmental, academic economists, drawn from eleven countries, many of them chosen because they were well-known advocates for divergent, often feuding, schools of thought on the problems and solutions to problems facing the international monetary system in the 1960s, most of whom had had significant public policy experience before entering academia. How did the Bellagio Group turn the tide of policy-maker and central banker opinion toward exchange rates as an instrument to correct balance of payments problems, as contemporaries suggested? My research finds the answer in Fritz Machlup’s collaborative and iterative approach to strategy and his cross-functional, cross-geographic, approach to organization.

Impact of Exchange Rate on Balance of Payment in Nigeria

This paper empirically investigates the impact of exchange rate on theNigeria External sector (the balance of payments position) using theOrdinary Least Square (OLS) method of estimation for data covering theperiod between 1970 and 2008. We found that exchange rate has asignificant impact on the balance of payments position. The exchange rate depreciation can actually lead to improved balance of payments position if fiscal discipline is imposed. We also found out that improper allocation and misuse of domestic credit, fiscal indiscipline, and lack of appropriate expenditure control policies due to centralization of power in government are some of the causes of persistent balance of payments deficits in Nigeria. We recommend that appropriate monitoring machineries be set up to ensure judicious use of credit and available foreign exchange. Exchange rate policies have to be used along with the fiscal and monetary instruments to get meaningful results. This implies that our balance of payments problems can be solved simultaneously from two angles, namely, boosting supply and managing demand. Export diversification and promotion, import substitution and frivolous import restriction cannot be over emphasized.

Currency Crisis Transmission through International Trade

The Eurozone recent crisis has shown how balance of payments problems in less developed European Monetary Union (EMU) member countries can affect EMU trading partners, spreading the crisis to a larger group of countries. This paper introduces a three-country dynamic general equilibrium model to analyze whether and how terms of trade effects can generate a spillover effect or a currency crisis transmission between countries. Specifically, using a two period model, it incorporates world market clearing conditions for tradables into a new theoretic model, analyzes net capital flow movements between countries, and establishes cross-border macroeconomic linkages. This paper shows how a currency crisis can transmit through the real (trade) sector channel; presents how changes in a foreign country's capital flow condition can influence home country's exchange rate through the change in terms of trade; mathematically proves that the significance of the real sector channel between two countries is positively associated with their trade levels; offers a new trade-related explanation for the occurrence of currency crises between countries; and describes how capital movement between two countries can lead to a currency crisis in one of these countries and in a third country.