Testing Some Restrictions in a Time Series Cross-Section Model: A Study of Seven LDCs.

The monetary approach to the balance of payments has been considered appropriate for analyzing problems facing less developed countries. A model in this t radition developed by Khan and Knight (1981) is examined using both p ooled and individual country data. Restrictions imposed on the model are tested within a less restricted framework. Results are found to b e sensitive to individual country specification, a priori restriction s, and estimation period. The paper points to the need for intensive testing of assumptions contained, both implicit and explicit, in a "r epresentative" model. Copyright 1988 by Blackwell Publishers Ltd and The Victoria University of Manchester