Domestic credit and the balance of payments: Empirical evidence for the Philippines, 1960-1980
Date
1984-02
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
The study attempts to evaluate the relationship between domestic credit and the balance of payments within the framework of the new approach to the theory of the balance of payments and adjustment process - the question of the balance of payments being a monetary phenomenon.
A model of the demand and supply functions of money is used to establish the relationship between domestic credit and the balance of payments. One interesting implication of the model is that for a balance of payments deficit to be reduced, expansion in credit should not exceed the rate of growth of the demand for money. Any expansion in credit which is greater than the rate of growth in the demand for money will most probably manifest itself as increases in demand for imports. As far as this model is concerned, the study implies that the balance of payments situation in the Philippines is explainable in monetary terms.
The empirical evidence of the study is consistent with the view that there is an inverse relationship between domestic credit and the balance of payments. The different measures of domestic credit expansion show significant effects on both the current account balance and the balance of payments. For the Philippines, the credit variable that shows to have the most significant effect on the country's balance of payments is D1, defined as Central Bank's net credit to the public sector, banking institution and the private sector. This finding is consistent also with the view that the best definition of domestic credit is the net domestic assets of the Central Bank. This makes D1 a good policy instrument in bringing about a possible remedial effect on the country's balance of payments deficit.