Monetary approach to balance of payments – the case of Botswana

Abstract

This study examines the applicability of monetary approach to balance of payments in Botswana for the period 1995-2013. The study employs Cointegration and Vector Error Correction Model (VECM) to examine whether monetary variables influence balance of payments. Only two relationships were established at the 5 percent level of significance. Net foreign assets and inflation reflected a negative relationship while interest rates were found to have a positive relationship with net foreign assets. Although non-mining GDP was found to be statistically insignificant the results showed that it is negatively related to balance of payments which confirmed the role of mining to the economy of Botswana. The results of VECM confirm that although some monetary variables suggested by monetary approach to balance of payments play a significant role, balance of payment in Botswana is not a purely monetary phenomenon, a finding which is in line with similar studies in other countries. The simultaneous use of both fiscal and monetary policies (policy mix) is therefore recommended to correct BOP disequilibrium in Botswana.