Testing the exogeneity specification underlying the monetary approach to the balance of payments: Some UK evidence

Simple theoretical and empirical models of the monetary approach to the balance of payments assume the joint exogeneity with respect to reserve flows of domestic variables such as prices, real income, interest rates, domestic credit and the money multiplier. Failure of this assumption has particularly serious implications for empirical monetary models of the balance of payments. This paper tests this exogeneity assumption using UK data for the most recent period of fixed exchange rates. The assumed exogeneity specification is decisively rejected.