Credit Growth and the External Current Account in Barbados.

Using the bounds testing approach to cointegration, this paper examines empirically the relationship between domestic credit and external account developments in Barbados in the period 1993-2007 with quarterly observations. A simple model that links the current account balance to domestic credit, along with a number of standard control variables is utilised. The results suggest that domestic credit has a significant negative impact on the external current account, in both the short and long run situations, giving credence to the hypothesis that balance of payment developments in Barbados may be considered primarily a monetary phenomenon. As such, controlling aggregate demand measures to reduce excessive credit creation remains an important strategy to ensure stability in the country's balance of payments accounts over the short to medium term. [ABSTRACT FROM AUTHOR]