IMPORTS

The demand for aggregate nominal imports in time period t is generally specified to be a positive function of domestic income. However, the demand for foreign goods and services should be related to total domestic expenditure on all goods and services and not to purchases of domestic goods and services by both domestic and foreign residents, which the use of income as an explanatory variable would involve.⁴

Therefore, in general, imports should be related to domestic demand for all goods including imports, namely, to aggregate expenditure.

However, particularly for developing countries, relating imports to aggregate domestic expenditure might involve some incorrect specification, as no account would be taken of the existing quantitative restrictions and controls on imports. In order to correct for this, the inclusion of a variety of proxies in the import equation—such as the level of international reserves, of exports, or of overseas assets—have been suggested by Islam (1961), Dutta (1964), and Turnovsky (1968). The basic assumption behind the use of such variables is the implied existence of a government policy-reaction function relating the imposition of controls inversely to one of them. The authorities in the country concerned are assumed to ease and to tighten restrictions on imports as their capacity to import increases or decreases. The most suitable proxy for such capacity would seem to be the level of net foreign assets, and this is used in the formulation.

Import demand is thus specified as a linear function of the level of net foreign assets and aggregate expenditure in time period t:

where M^d is demand for nominal imports, NFA is the level of net foreign assets, and AE is aggregate nominal expenditure; u is a random error term with “white noise” properties.⁵

The expected pattern of signs is as follows:

Because of the assumption that the countries are small and have fixed exchange rates, a relative price argument in (1) is impossible, since domestic and foreign prices would be equal, and the relative price ratio would be constant.

Actual imports in period t are assumed to adjust to excess demand for imports, that is, to the difference between demand in period t and actual supply in the same period:

where D is an operator equivalent to some form of stochastic differentiation (i.e., it is equivalent to d/dt). A further assumption is that import supply is equal to actual imports:

Formulations of this type have been applied to studies of import behavior on the grounds that imports of many countries, especially developing ones, consist mostly of durable goods, the demand for which has been shown to fit into this type of framework.⁷ This specification introduces an explicit distributed lag structure, through costs of adjustment, into the determination of imports.

Substituting (1) into (1), the estimating equation becomes:

EXPORTS

In the small-country case, exporters are generally price takers in the world market and can sell whatever they produce. The volume of exports is therefore determined by supply conditions present in the export sector. An increase in the capacity to produce in the export sector should lead to an increase in exports.

Capacity to produce in the export sector is related directly to the capacity to produce in the entire economy, and an increase (decrease) in the latter capacity would lead to an increase (decrease) in exports. If income is considered a suitable indicator of capacity to produce, exports can be specified as a positive function of domestic income. Whether exports will increase more than in proportion to income will depend on the supply elasticity of domestic goods relative to the supply elasticity of exports.⁸

An indicator of the capacity to produce that would be more appropriate than current income is “permanent,” or expected, income. Exports are specified as a function of this long-run concept, rather than the shortrun concept of current income:

where X is the nominal value of exports and Y^* is the concept of permanent nominal income in time period t; v is a random error term.

The parameter bx is expected to be positive.

Permanent income is generated in the following way:

Permanent income in time period t adjusts to the difference between permanent income and actual income (Y) in period t.

Equation (5) can be rewritten as:

Substituting (6) into (4):

and solving for DX(t):

where ε(t) = (D + β), v(t) is a moving-average process of order one.⁹

The estimating equation (8) could also have been derived through a partial-adjustment hypothesis, although the error term would be different.

AGGREGATE EXPENDITURE

In the standard Keynesian model of a closed economy, aggregate expenditure (consumption plus investment) depends on the level of domestic income and the domestic interest rate. The familiar IS-LM framework considered within a disequilibrium framework shows how a change in monetary policy affects expenditure, through the impact of changes in the interest rate on investment expenditure. Rather than introducing the rate of interest, which represents the yield on only one asset, it may be more appropriate to include in the expenditure function the stock of liquid assets that the public desires to hold directly. Given this stock, an increase in the money supply would raise it above the desired level. This would create an excess demand for goods and services and would lead to higher expenditure as the public attempted to reduce its excess cash balances. Increases in nominal income could also be expected to increase nominal expenditure.

The equation for “desired” expenditure can be specified as follows:

where AE^d is desired aggregate nominal expenditure, M_o is the stock of money representing the stock of liquid assets, and Y is nominal income; w is a random error term, and c1 and c2 are parameters having the following pattern of signs:

The cash balances variable, M_o, included in equation (9) is defined as broad money, comprising currency, demand deposits, and time and savings deposits. In developing countries, with a limited range of financial assets, the use of Mo to represent all liquid assets would not be too unrealistic. The expenditure variable, AE, includes government expenditure, so that an implicit assumption is that the fiscal authorities are constrained in their deficit financing by the monetary authorities.

A behavioral equation such as (9), although outwardly different, has been shown by Fleming (1938) and Rhomberg (1965) to be entirely consistent with the general Keynesian formulation.

The actual value of expenditure is assumed to adjust to the difference between “desired” expenditure and actual expenditure:

By substituting (9) into (10), the differential equation in DAE(t) is obtained:

This is the equation that will be estimated.

NOMINAL INCOME

Nominal domestic income is equal to nominal aggregate domestic expenditure plus nominal exports minus nominal imports:

This identity must hold, ex post.

BALANCE OF PAYMENTS

The balance of payments in nominal terms is equal to the trade balance (exports minus imports) plus all other items in the balance of payments account; it is also equal to the change in a country’s net foreign assets.¹⁰ Therefore, the identity can be written as:

where DK(t) represents the nontrade variable that contains services, short-term and long-term capital flows (including official), and all types of foreign aid receipts or repayments. For the purpose of the model, this item (i.e., DK) is assumed to be determined outside the system.

THE MONEY SUPPLY

The stock of money in an economy is equal to the stock of net foreign assets and domestic credit of the consolidated banking system:

where C is the stock of domestic credit. This concept of money, as will be recalled, is the broad one, including time and savings deposits.

C is treated in this study as a monetary policy instrument. For this to be justified, either of two related assumptions must be satisfied: the authorities must be able to control the instrument directly, or the money multiplier relating the money supply to the monetary base—Mo = m H, where H is the stock of high-powered money (reserve money) and m is the multiplier—must be constant. It can be shown that the relationship between domestic credit and the assets of the central bank can be expressed as:

so that the monetary authorities can control total credit in the economy by controlling the stock of net domestic assets (NDA). In the countries under consideration, the multiplier was, in general, relatively stable over the period.¹¹

SUMMARY OF MODEL

Combining equations (3), (8), and (11) and identities (12), (13), and (14), the basic model is specified in linear form.

where the variables are defined in domestic currency terms as follows:

• M= nominal value of imports

• X= nominal value of exports

• AE= aggregate nominal domestic expenditure

• Y= nominal domestic income

• DNFA= change in net foreign assets of the consolidated banking system

• Mo= nominal money supply

• DK= all items in the balance of payments other than the trade balance

• C= domestic credit of the consolidated banking system.

The causal sequence of the model can be outlined as follows.¹² An increase in the stock of net domestic assets (an expansionary monetary policy) would result in an expansion of the stock of money,¹³ from the identity (14). This expansion would increase the rate and the level¹⁴ of nominal domestic expenditure as the public attempted to get rid of its excess liquidity, from equation (11). This rise in nominal domestic expenditure would have two effects: it would lead to an increase in domestic nominal income, from the identity (12), and it would also increase imports above their pre-expansionary monetary policy level, from equation (3). Naturally, this rise in imports would lower income. Assuming, however, that the effect on the income that is due to an increase in expenditure is greater than that due to the increase in the level of imports,¹⁵ overall income could be expected to rise. This rise would increase expenditure further and would also increase the rate of change and the level of exports, from equation (8). The ensuing rise in the level of imports would tend to worsen the balance of payments, from identity (13); if this rise exceeded that in exports, the balance of payments would worsen. If sterilization policies were not put into effect, the money supply would then decline. A once-and-for-all increase in C would have a temporary effect on the economy in the short run, but in the absence of sterilization policies, in the longer run the effects would be completely reversed.

The process just outlined is a direct extension of the monetarist approach to an open economy. Theoretical arguments of a similar nature can be found in Prais (1961), Laffer (1968), Johnson (1972), and Guitian (1973). An empirical application of this type of model has been made by Polak (1957) and Rhomberg (1965) for a number of countries.

Argentina

Table 1 shows the structural equation estimates. In the import equation (1), all estimated coefficients have the expected signs and are significant at the 5 per cent level. Net foreign assets appear to impose a large constraint on the change in imports, with a rise of, say, $a 1 million in NFA increasing the change in imports by roughly half a million. Aggregate nominal expenditure has a positive effect on imports, as expected in theory. The lag in adjustment of imports to desired levels is fairly long,¹⁷ as the estimate of the coefficient of adjustment is on the low side.

Current nominal income has a positive effect on the change in exports, and the estimated coefficient is significant at the 1 per cent level. The estimated coefficient of the level of exports also has the correct sign and is highly significant in equation (2).

In the aggregate expenditure equation, the estimated coefficient of the stock of money is fairly large and has the correct positive sign. However, the coefficient of current income is not significantly different from zero even at the 10 per cent level. This is an unusual result, since it implies that neither consumption nor investment expenditure is influenced by current income. This may be due to a high degree of multicollinearity between M_o and Y, leading to a high variance for the estimated coefficient of income. The estimate of the coefficient of adjustment is significant at the 1 per cent level and has the expected negative sign. The mean-time lag in the adjustment of actual expenditure to desired levels is a little more than one year.

The estimates of the structural equations show that the model appears to fit Argentine data fairly well, with only one estimated coefficient turning out to be insignificant. Chart 1 shows the plots of the actual and simulated values of the balance of trade and changes in nominal income. These within-sample predictions are derived from a reduced form equation relating the endogenous variables to the exogenous or policy-determined variables.

Chart 1 shows that the model appears to track the change in income reasonably well, although substantial differences between the actual and simulated values do appear toward the latter part of the period.

For the trade-balance simulations, the model captures most of the changes that took place. Errors of about $a 200 million are found

Table 1.

Argentina

Table 1.

Argentina

$\begin{array}{cc}\left(\begin{array}{c}1\end{array}\right)& DM\left(t\right)=0.105+\underset{\left(3.34\right)}{0.419}NFA\left(t\right)+\underset{\left(4.16\right)}{0.018}AE\left(t\right)-\underset{\left(2.47\right)}{0.194}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.147+\underset{4.77}{0.087}\end{array}Y\left(t\right)-\underset{\left(3.92\right)}{0.569}X\left(t\right)$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=0.305+\underset{\left(41.18\right)}{1.697}Mo\left(t\right)+\underset{\left(0.36\right)}{0.031}Y\left(t\right)-\underset{\left(29.33\right)}{0.842}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}4\end{array}\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(5\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

View Table

Table 1.

Argentina

$\begin{array}{cc}\left(\begin{array}{c}1\end{array}\right)& DM\left(t\right)=0.105+\underset{\left(3.34\right)}{0.419}NFA\left(t\right)+\underset{\left(4.16\right)}{0.018}AE\left(t\right)-\underset{\left(2.47\right)}{0.194}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.147+\underset{4.77}{0.087}\end{array}Y\left(t\right)-\underset{\left(3.92\right)}{0.569}X\left(t\right)$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=0.305+\underset{\left(41.18\right)}{1.697}Mo\left(t\right)+\underset{\left(0.36\right)}{0.031}Y\left(t\right)-\underset{\left(29.33\right)}{0.842}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}4\end{array}\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(5\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

Argentina

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Argentina

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in the period 1963-67, while they are generally much smaller in the years up to 1963.

COLOMBIA

In the structural model, estimates shown in Table 2 (the estimated coefficients in the import equation) are all significantly different from zero and have the expected signs. A unit increase in the net foreign asset holdings of the authorities will lead to a change in imports of 0.962 unit, and a similar increase in aggregate expenditure will change imports by only 0.035 unit. The coefficient of adjustment implies that importers adjust to the desired level in about three years.

Current nominal income has a positive and significant effect (at the 5 per cent level) on the change in exports, but the estimate of the coefficient of adjustment of permanent income, although having the correct sign, is not significantly different from zero. A suitable proxy for capacity to produce in Colombia seems to be current rather than permanent income.

The estimated coefficients of the money supply and income are both significant and positive in the expenditure equation. A unit increase in the stock of money will have a proportionately greater effect on the change in nominal expenditure, leading to an increase of 1.387 units. A similar increase in income will change expenditure by 0.816 unit. Nominal expenditure will adjust to its desired level in approximately 16 months after the money supply or income changes.

Chart 2 shows the within-sample predictions for the change in income and the trade balance. The model is not able to capture changes in income at all well, as is evident from the first half of the chart; major fluctuations of about Col$2 billion appear to have taken place on occasion. The predictions of the trade balance, however, are much more accurate except for 1969, for which the model predicted a further worsening and the deficit in fact remained constant. The model does well in capturing the major movements, in the trade balance that took place from 1964 onward, including the sharp cycle from 1964 to 1968.¹⁸

DOMINICAN REPUBLIC

Table 3 shows the estimates of the structural model for the period 1953-70. The estimated coefficients of net foreign assets and aggregate

Table 2.

Colombia

Table 2.

Colombia

$\begin{array}{cc}\left(\begin{array}{c}1\end{array}\right)& DM\left(t\right)=0.370+\underset{\left(4.19\right)}{0.962}NFA\left(t\right)+\underset{\left(2.34\right)}{0.035}AE\left(t\right)-\underset{\left(2.17\right)}{0.355}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.202+\underset{\left(2.05\right)}{0.061}\end{array}Y\left(t\right)-\underset{\left(1.32\right)}{0.310}X\left(t\right)$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=0.177+\underset{\left(6.34\right)}{1.387}Mo\left(t\right)+\underset{\left(3.18\right)}{0.816}Y\left(t\right)-\underset{\left(7.13\right)}{0.748}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}4\end{array}\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(5\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

View Table

Table 2.

Colombia

$\begin{array}{cc}\left(\begin{array}{c}1\end{array}\right)& DM\left(t\right)=0.370+\underset{\left(4.19\right)}{0.962}NFA\left(t\right)+\underset{\left(2.34\right)}{0.035}AE\left(t\right)-\underset{\left(2.17\right)}{0.355}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.202+\underset{\left(2.05\right)}{0.061}\end{array}Y\left(t\right)-\underset{\left(1.32\right)}{0.310}X\left(t\right)$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=0.177+\underset{\left(6.34\right)}{1.387}Mo\left(t\right)+\underset{\left(3.18\right)}{0.816}Y\left(t\right)-\underset{\left(7.13\right)}{0.748}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}4\end{array}\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(5\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

Colombia

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Table 3.

Dominican Republic

Table 3.

Dominican Republic

$\begin{array}{cc}\left(1\right)& DM\left(t\right)=0.019+\underset{\left(4.36\right)}{0.607}NFA\left(t\right)+\underset{\left(6.58\right)}{0.093}AE\left(t\right)-\underset{\left(7.04\right)}{0.623}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.069+\underset{\left(2.03\right)}{0.054}Y\left(t\right)-\underset{\left(3.22\right)}{0.385}X\left(t\right)\end{array}$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=0.054+\underset{\left(5.21\right)}{1.232}Mo\left(t\right)+\underset{\left(2.72\right)}{1.364}Y\left(t\right)-\underset{\left(8.87\right)}{0.764}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(4\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}5\end{array}\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

View Table

Table 3.

Dominican Republic

$\begin{array}{cc}\left(1\right)& DM\left(t\right)=0.019+\underset{\left(4.36\right)}{0.607}NFA\left(t\right)+\underset{\left(6.58\right)}{0.093}AE\left(t\right)-\underset{\left(7.04\right)}{0.623}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.069+\underset{\left(2.03\right)}{0.054}Y\left(t\right)-\underset{\left(3.22\right)}{0.385}X\left(t\right)\end{array}$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=0.054+\underset{\left(5.21\right)}{1.232}Mo\left(t\right)+\underset{\left(2.72\right)}{1.364}Y\left(t\right)-\underset{\left(8.87\right)}{0.764}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(4\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}5\end{array}\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

Dominican Republic

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nominal expenditure are both significantly different from zero at the 1 per cent level and have the expected positive signs in equation (1). A 1-unit increase in each of these two variables would increase the change in imports by 0.7 unit.¹⁹ Imports appear to adjust fairly rapidly to eliminate excess demand, reaching their desired position in little more than a year and a half, as calculated from the estimated coefficient of the level of imports.

The level of current nominal income has a positive and significant effect on the value of exports, and the coefficient of adjustment of permanent income is also significant. Permanent nominal income adjusts in approximately two years.

All estimated coefficients in the nominal expenditure equation are significantly different from zero at the 5 per cent level and have the expected signs. A simultaneous increase of one unit in the stock of money and the level of current income would lead to an increase in imports of 2.6 units. The estimated coefficient of adjustment of nominal expenditure to its desired level is 0.764, implying a mean-time lag in adjustment of slightly more than 16 months.

The model appears to fit the Dominican Republic data fairly well, as all estimated coefficients had the correct signs and were significantly different from zero at the 5 per cent level.

Chart 3 shows the plots of the actual and simulated values of the change in income and the trade balance. Changes in nominal income fluctuate quite substantially, and the fitted and actual values diverge frequently. The largest error appears in 1966, for which the model overestimated the change by about RD$150 million; the actual level of nominal gross domestic product was about RD$1 billion, so that the error was approximately 15 per cent. The movements in the trade balance, however, are very accurately tracked. This occurs despite the fact that the plot of the actual trade balance shows substantial cyclical variation. The largest error was approximately RD$20 billion (1969).

INDIA

Table 4 shows the structural model estimates. In the import equation, the level of aggregate expenditure has a positive effect as expected and the estimated coefficient is significant at the 1 per cent level. The surprising result is that the level of net foreign assets has no effect on the change in imports. In the framework of the model this has one of two

Table 4.

India

Table 4.

India

$\begin{array}{cc}\left(1\right)& DM\left(t\right)=3.077-\underset{\left(0.90\right)}{0.327}NFA\left(t\right)+\underset{\left(3.70\right)}{0.045}AE\left(t\right)-\underset{\left(4.12\right)}{0.746}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.068+\underset{\left(5.64\right)}{0.028}Y\left(t\right)-\underset{\left(3.52\right)}{0.259}X\left(t\right)\end{array}$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=3.262+\underset{\left(17.53\right)}{1.915}Mo\left(t\right)+\underset{\left(2.43\right)}{0.292}Y\left(t\right)-\underset{\left(21.17\right)}{0.991}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(4\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}5\end{array}\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

View Table

Table 4.

India

$\begin{array}{cc}\left(1\right)& DM\left(t\right)=3.077-\underset{\left(0.90\right)}{0.327}NFA\left(t\right)+\underset{\left(3.70\right)}{0.045}AE\left(t\right)-\underset{\left(4.12\right)}{0.746}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.068+\underset{\left(5.64\right)}{0.028}Y\left(t\right)-\underset{\left(3.52\right)}{0.259}X\left(t\right)\end{array}$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=3.262+\underset{\left(17.53\right)}{1.915}Mo\left(t\right)+\underset{\left(2.43\right)}{0.292}Y\left(t\right)-\underset{\left(21.17\right)}{0.991}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(4\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}5\end{array}\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

India

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India

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India

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possible implications: either restrictions are not important in the determination of imports in India or the authorities do not look to the country’s net foreign asset position when changing the level of restrictions; since restrictions were operative in India over the period 1952-70, the latter implication would seem to be more relevant. The mean-time lag in adjustment of imports is just over one year.

The results of the export equation show that a unit increase in current income will lead to an increase of 0.228 unit in exports. The estimated coefficient of income is highly significant. The estimated coefficient of the adjustment of permanent income has the correct sign and is also significantly different from zero.

Both the nominal stock of money and nominal income exert a positive effect on the change in aggregate nominal expenditure. The effect of a simultaneous increase of one unit each in both these variables would raise imports by 2.207 units. The adjustment of actual nominal expenditure to a desired level is fairly rapid, with the mean-time lag being marginally greater than one year.

Chart 4 shows the simulated and actual values of the change in income and in the trade balance. Changes in income are not very well predicted, with substantial errors appearing especially in the latter part of the period.²⁰ Except for the years 1958 and 1967, the direction in which income is changing is tracked well by the model; so is the direction of trade balance movements, with the predicted values being close to the actual, especially in the period after 1965.

MEXICO

Table 5 gives the estimates of the structural model. All estimated coefficients in the import equation are significantly different from zero at the 5 per cent level. Net foreign assets and aggregate nominal expenditure both have a positive impact on the change in nominal imports. The adjustment of imports takes almost three years to complete.

In the export equation, both of the estimated coefficients are significantly different from zero and have the expected signs. An expansion in current nominal income of one unit will lead to an increase in nominal imports of 0.019 unit. The estimated coefficient of the adjustment of permanent nominal income, that is, the “expectations coefficient,” is 0.270.

Table 5.

Mexico

Table 5.

Mexico

$\begin{array}{cc}\left(1\right)& DM\left(t\right)=0.003+\underset{\left(5.94\right)}{0.841}NFA\left(t\right)+\underset{\left(3.30\right)}{0.013}AE\left(t\right)-\underset{\left(5.15\right)}{0.368}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.003+\underset{\left(2.73\right)}{0.019}Y\left(t\right)-\underset{\left(2.64\right)}{0.270}X\left(t\right)\end{array}$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=0.001+\underset{\left(9.46\right)}{2.025}Mo\left(t\right)+\underset{\left(0.27\right)}{0.072}Y\left(t\right)-\underset{\left(10.14\right)}{0.983}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(4\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}5\end{array}\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$

View Table

Table 5.

Mexico

$\begin{array}{cc}\left(1\right)& DM\left(t\right)=0.003+\underset{\left(5.94\right)}{0.841}NFA\left(t\right)+\underset{\left(3.30\right)}{0.013}AE\left(t\right)-\underset{\left(5.15\right)}{0.368}M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}2\end{array}\right)& DX\left(t\right)=0.003+\underset{\left(2.73\right)}{0.019}Y\left(t\right)-\underset{\left(2.64\right)}{0.270}X\left(t\right)\end{array}$

$\begin{array}{cc}\left(3\right)& DAE\left(t\right)=0.001+\underset{\left(9.46\right)}{2.025}Mo\left(t\right)+\underset{\left(0.27\right)}{0.072}Y\left(t\right)-\underset{\left(10.14\right)}{0.983}AE\left(t\right)\end{array}$

$\begin{array}{cc}\left(4\right)& Y\left(t\right)=AE\left(t\right)+X\left(t\right)-M\left(t\right)\end{array}$

$\begin{array}{cc}\left(\begin{array}{c}5\end{array}\right)& DNFA\left(t\right)=X\left(t\right)-M\left(t\right)+DK\left(t\right)\end{array}$

$\begin{array}{cc}\left(6\right)& Mo\left(t\right)=NFA\left(t\right)+C\left(t\right)\end{array}$