Abstract
This chapter analyzes the sustainability of the Balance of Payments (BOP) on aggregate by examining the dynamic relationship between the current account and capital account balance necessary to sustain economic activity. The results show that positive shocks to openness and domestic credit cause an increase in the optimal capital requirements needed to sustain economic activity over time. Corruption in Jamaica has a negative impact on the flow of foreign capital. Political stability and law and order have positive impacts on the level of capital flows. Meanwhile, an increase in real interest rate and crude oil prices and a depreciation of the local currency have negative impacts on capital flows.
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- 1.
An extension of, Giovannini, A., & de Melo, M. (1993). Government revenue from financial repression. American Economic Review, 83, 4, 953–963.
- 2.
This is measured as the difference between the (effective) external and domestic rate on government debt times the government’s domestic debt.
- 3.
Kaminsky G.L., Reinhart, C., & Végh, C.A. (2005). When it rains, it pours: Procyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual 2004, Volume 19 (2005), MIT Press.
- 4.
The ordering of the variables are important due to the effect of the Cholesky decomposition.
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Haughton, A. (2017). Balance of Payments and Capital Account Sustainability. In: Developing Sustainable Balance of Payments in Small Countries. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-53031-4_6
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DOI: https://doi.org/10.1007/978-3-319-53031-4_6
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