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On the relation between financial flows and the trade balance in developing countries

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  • Magda Kandil

Abstract

Using time-series annual data for a sample of developing countries, this paper investigates the empirical validity of theoretical predictions regarding determinants of fluctuations in the trade balance and financial flows. The motive is to see if standard conjectures about possible determinants have broad support across these countries. While the evidence provides some support to theoretical predictions, statistical significance appears limited. Given mixed results, a large component of fluctuations in the trade balance and financial flows appears to be random in developing countries. Such randomness limits the ability of policy makers to interpret cyclical variations in components of the balance of payments. Moreover, this randomness raises concerns about the sustainability of a widening trade deficit and sources of financing in many developing countries.

Suggested Citation

  • Magda Kandil, 2009. "On the relation between financial flows and the trade balance in developing countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 18(3), pages 373-393.
    • Handle: RePEc:taf:jitecd:v:18:y:2009:i:3:p:373-393
    DOI: 10.1080/09638190902986520
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    Cited by:

    1. Muhammad Ali Nasir & Mary Leung, 2021. "US trade deficit, a reality check: New evidence incorporating asymmetric and non‐linear effects of exchange rate dynamics," The World Economy, Wiley Blackwell, vol. 44(3), pages 818-836, March.
    2. Chiu, Yi-Bin & Sun, Chia-Hung D., 2016. "The role of savings rate in exchange rate and trade imbalance nexus: Cross-countries evidence," Economic Modelling, Elsevier, vol. 52(PB), pages 1017-1025.

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