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ACCOMMODATING & AUTONOMOUS CAPITAL FLOWS

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Abhijeet S
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ACCOMMODATING & AUTONOMOUS CAPITAL FLOWS - September 13th, 2010

ACCOMMODATING & AUTONOMOUS CAPITAL FLOWS


Economists have often found it useful to distinguish between autonomous and accommodating capital flows in the BOP. Transactions are said to Autonomous if their value is determined independently of the BOP. Accommodating capital flows on the other hand are determined by the net consequences of the autonomous items. An autonomous transaction is one undertaken for its own sake in response to the given configuration of prices, exchange rates, interest rates etc, usually in order to realise a profit or reduced costs. It does not take into account the situation elsewhere in the BOP.


An accommodating transaction on the other hand is undertaken with the motive of settling the imbalance arising out of other transactions. An alternative nomenclature is that capital flows are ‘above the line’ (autonomous) or ‘below the line’ (accommodating).


Obviously the sum of the accommodating and autonomous items must be zero, since all entries in the BOP account must come under one of the two headings. Whether the BOP is in surplus or deficit depends on the balance of the autonomous items. The BOP is said to be in surplus if autonomous receipts are greater than the autonomous payments and in deficit if vice – a – versa.


Essentially the distinction between both the capital flow lies in the motives underlying a transaction, which are almost impossible to determine. We cannot attach the labels to particular groups of items in the BOP accounts without giving the matter some thought.


For example a short term capital movement could be a reaction to difference in interest rates between two countries. If those interest rates are largely determined by influences other than the BOP, then such a transaction should be labelled as autonomous.


Other short term capital movements may occur as a part of the financing of a transaction that is itself autonomous (say, the export of some good), and as such should be classified as accommodating.


There is nevertheless a great temptation to assign the labels ‘autonomous’ and ‘accommodating’ to groups of item in the BOP. i.e. to assume, that the great majority of trade in goods and of long term capital movements are autonomous, and that most short term capital movements are accommodating, so that we shall not go far wrong by assigning those labels to the various components of the BOP accounts.


Whether that is a reasonable approximation to the truth may depend in part on the policy regime that is in operation. For example what is an autonomous item under a system of fixed exchange rates and limited capital mobility may not be autonomous when the exchange rates are floating and capital may move freely between countries.
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