Theoretical Approaches to Rebalancing the Balance of Payments: A Literature Review

The issue of rebalancing the balance of payments has received ongoing attention in economic literature, prompting the development of various theoretical frameworks aimed at restoring external equilibrium. This review critically examines the main strands of thought that have shaped this discussion. It first explores the automatic adjustment mechanisms proposed by classical economists, emphasizing their reliance on price and income changes. It then examines administered adjustment theories, including the absorption approach, the critical elasticities framework, and the monetary approach to the balance of payments. By combining these perspectives, the review provides a structured understanding of the conceptual development and policy implications of balance of payments adjustment strategies.