THE MONETARY APPROACH AND THE KEYNESIAN APPROACH TO THE BALANCE OF PAYMENTS: A CASE STUDY OF THAILAND

Though Thailand's balance of payments has fluctuated since the 1950s, very little theoretically sound empirical work has been done on it. Also, the effects of monetary policy on the balance of payments have not been examined specifically for the country. This study attempts to fill the gap by empirically testing the monetary and the Keynesian approaches to the balance of payments in Thailand and by suggesting some theoretical implications in the light of the empirical results.;The Keynesian theory analyzes the conditions prevailing in the traded goods and asset markets and attributes the causes the balance-of-payments disequilibrium to factors affecting the demand for, and the supply of, exports and imports, or to factors affecting the capital flows. The empirical results based upon the Keynesian model suport the predictions of the Keynesian theory but yield contradictory predictions made by the monetary model. The differences between predictions made by the monetary and Keynesian models are, however, due to the partial nature of both theories. To resolve the differences, a synthesis of monetary and Keynesian approaches to short-run balance-of-payments theory is developed. In the synthesis framework, real income, price level, rate of interest, money supply, and the balance of payments are determined simultaneously.;The standard monetary theory analyzes the conditions prevailing in the money market in an open economy under the fixed exchange rate system and attributes the causes of balance-of-payments disequilibrium to exogenous changes in factors affecting the demand for, and the supply of, the stock of money. The central implication of the theoretical inquiry according to the monetary theory is that increasing the domestic component of the monetary base at a rate too fast relative to the growth of the demand for money will result in a balance-of-payments deficit as well as in a short-run rate of inflation higher than that of the rest of the world. The empirical results based upon the monetary model support the predictions of the standard monetary theory. The Thai rate of inflation is significantly explained by the external inflation but not by internal monetary disequilibrium. The policy of monetary expansion that allowed the supply of money to grow faster than the demand for money was responsible for the decline in the foreign exchange reserve.