The Malaysian balance of payments: keynesian approach versus monetary approach

Abstract

There are two competing theories of balance of payments the: Keynesian and the monetary theories. Each of the two approaches provides distinct explanations on how the determinants of the balance of payments could lead to equilibrium and disequilibriun of the balance of payments account. Both theories also rank differently the importance of merchandise/real account (Trade Balance) and monetary account (Official Reserve Transactions Balance) of the balance of payments. The paper attempts to determine whether the Keynesian or the Monetanst approach is the more correct theory as far as the Malaysian balance of payments is concerned, so that the results will enable the government to formulate the correct policies on the balance of payments in the future. To conduct the examination of the two theories, a model based on the distnbuted-lag polynomial, specificlly on the Almon lag, is developed In order to pursue the comparison of the two views, two types of tests are done. The first test checks the correctness of the signs of the coefficients of the regressors in the two equations of financial flow (from Official Reserve Transactrons Balance) and trade flow (from Trade Balance) The second test is an examination of the speed of adjustment of the two accounts m order to decide which account is normally affected fast by any disturbance on the balance of payments. The results of the study show that the signs of regressors of the Trade Balance (TB) equation support the Keynesian view while the signs of regressors of the Official Reserve Transactions Balance (ORTB) equation support both Keynesian and Monetary views it is also found that the ORTB dominates the TB in terms of quickness of adjustment, so the ORTB is an autonomous account and the TB is an accomodating account As far as Malaysia`s balance of payments policies are concerned, the government had formulated and implemented correct policies as reflected by the results of the study. Fiscal policy had been used on the TB and a mix of fiscal and monetary policies had been used on the ORTB smce 1970s. Obviously, the government had also paid more attention on the monetary account (ORTB account), such as services account and the flows of `hot money`, which was mainly the source of the balance of payments deficit The conclusion is, thus, that Keynesian theory should be adopted if the balance of payments disequilibrium is due to disequilibrium in the TB account. On the other hand, both Keynesian and monetary theones should be mcorporated in policies designed 1f the disequilibrium of the balance of payments is caused by disequilibrium in the ORTB account. Additionally, the monetary account (ORTB account) is considered as the main account which is first affected by any disturbance in the balance of payments Thus, the policy fomulated and implemented on the Malaysian balance of payments in the future should largely concentrate on this account.