ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles by M K SaggarSubscribe to M K Saggar

Applicability of Monetary Approach to Balance of Payments

Applicability of Monetary Approach to Balance of Payments THE view that money market disequilibrium plays a fundamental role in the determination of balance of payments (BP) has gained considerable importance in economic literature in the past three decades. In what has come to be known as the Monetary Approach to BP (MBOP), it has been propagated that BP is essentially a monetary phenomenon. Disequilibrium in BP is the direct consequence of mis-match between demand for money and supply of money. Furthermore, a major proposition of the MBOP is that a devaluation will be successful unless accompanied by an equi- proportionate expansion in domestic credit.1 The MBOP, developed by the economists associated with the 'Chicago Workshop' in the sixties and early seventies, soon became the cornerstone of the stabilisation programmes sponsored by the International Monetary Fund (IMF).2 In fact, the Fund has been an ardent advocate of the approach in case of developing countries, notwithstanding its stagflationary potential and the questionable causality from domestic component of money to net foreign assets.

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