The Monetary Approach to Understanding the Balance of Payments for the Fiji Islands

The monetary approach to the balance of payments postulates a unidirectional, negative causality running from domestic credit to net foreign assets. Using data for Fiji for the period 1974-2003, we find a statistically significant, negative correlation between domestic credit and net foreign assets; but the Granger causality test reveals no statistical evidence of causality running from domestic credit to net foreign assets. This finding suggests that domestic credit is mainly passive and is not the central tool of monetary policy to which the balance of payments adjusts