“This paper tests the monetary approaches to Zimbabwe’s balance of payments during the period 1980 to 1991 and it tests the validity of the hypothesis that under the fixed exchange rate system, changes in the nation’s demand for money relative to its supply led to changes in international reserves. It also examines whether excess money supply played a role as a disturbance using multivariate cointegration and error-correcting modelling. The empirical results suggest that money played a significant role in determining the balance of payments. The one-to-one negative relationship and strong link between domestic credit and the flow of international reserves is established. The policy conclusion is that, given a stable demand for money function, balance of payments disequilibrium can be corrected through appropriate financial planning and monetary targeting.”
