Monetary Approach to Balance of Payments: The Evidence on Reserve Flow from Pakistan

The monetary approach to balance-of-payments theory suggests that balance of payments defecits are related to disequilibrium in the international money market and, as such, involve a flow of international reserves. A cross-section study of 39 IDCs, including Pakistan, validates the MABOPs theory for the analySiS of balance of payments of these countries despite the absence of underlying assumptions in these countries. It is contended that while it may be possible to obtain significant’results on a cross-section basis, the individual country data for many of these IDes may not validate the MABOPs theory, mainly due to the absence of underlying assumptions, due to significantly heterogenous economic structures in many of these countries, and due to the common prevalence of restrictive financial policies in a large number of LDCs. In this paper the propositions of the MABOPs theory are tested for Pakistan only, using the same model as applied to 39 LDCs on a crosssection basis. The results show that reserves movement in Pakistan cannot be explained by the version of MABOPs theory.