The Balance of Payments and Stabilization Policies

Abstract

External imbalances arise from mismatches in some of the main accounts of the balance of payments: the current account or the capital and financial account. Additionally, various endogenous and exogenous factors also influence these imbalances, such as productivity, interest rates—both domestic and international—and terms of trade, among others. These shocks or impacts on the external sector affect exchange rates, potentially deepening the imbalances and creating a vicious cycle that negatively impacts domestic economic activity. This situation is further aggravated in developing economies with poorly diversified exports, as the external constraint becomes more pronounced. Therefore, the proper implementation of macroeconomic stabilization policies (monetary, fiscal, and trade policies) can help mitigate the internal negative effects of these imbalances.

JEL:  F31, F32, F41