Regional balance of payments problems : an Interpretation

Research output: Journal PublicationsJournal Article (refereed)peer-review

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This paper lays out a simple model and an accounting framework for analysing the relationship between different components of regional savings and investment, between internal savings and external savings, and between government sector savings and private sector savings. In general, stepping up investment to enhance regional growth must cause a deterioration of the regional trade balance in the short run, even though the trade balance is likely to improve in the longer run. Analyses in recent years often ignore the effect of capital formation on trade. As an example, the German unification, in requiring a rebuilding of capital stock suddenly rendered obsolete by a major change in relative factor prices, requires a real appreciation of the DM and a deterioration of the German trade balance. Given nominal exchange rates, this means higher German inflation than its trading partners. On the other hand, the paper shows that, under fixed exchange rates, different inflation rates among regions may be part of the adjustment needed to re-establish trade balance. In the absence of this (either because of market rigidity or deliberate policy) persistent inter-regional fiscal transfers may be required. The “success” of the American fixed exchange rate model should be interpreted in the light of large inter-regional fiscal transfers that have taken place decade after decade. Proponents for a single European currency should be prepared that similar fiscal transfers will become necessary.
Original languageEnglish
Pages (from-to)457-466
Number of pages10
JournalRegional Studies
Issue number5
Publication statusPublished - 1993
Externally publishedYes

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