Title

Regional balance of payments problems : an Interpretation

Document Type

Journal article

Source Publication

Regional Studies

Publication Date

1-1-1993

Volume

27

Issue

5

First Page

457

Last Page

466

Keywords

Regional balance of payments, Regional development, Currency unification, Optimal currency areas

Abstract

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.

DOI

10.1080/00343409312331347685

Print ISSN

00343404

E-ISSN

13600591

Publisher Statement

Copyright © 1993 Routledge

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Full-text Version

Publisher’s Version

Recommended Citation

Ho, L. S. (1993). Regional balance of payments problems: An Interpretation. Regional Studies, 27(5), 457-466. doi: 10.1080/00343409312331347685