Does the misuse of net errors and omissions arise from a corruption culture?
Does the misuse of net errors and omissions arise from a corruption culture?

Summary/Abstract: The balance of payments, particularly the current account deficit, has longbeen of interest to researchers. However, there is a paucity of research on the neterrors and omissions in this context. Nevertheless, some countries have beenresorting to the net errors and omissions account as a means of offsettingpersistent current account balance deficits, a practice which can cause manymacroeconomic problems such as increasing exchange rates, inflation,unemployment, and economic contraction. This paper investigates therelationship between net errors and omissions (NEO) by setting them as thedependent variable and finance, capital, current account balance, reserves, andcorruption as independent variables. The data availability constraints allow forthe analysis of 25 countries with the highest volumes of net errors and omissionsover the period 2012-2021. Preliminary tests indicated that ridge regression wouldbe the optimal research method. The results suggest that corruption has astatistically significant positive effect on net errors and omissions. In other words,countries with higher levels of corruption tend to misuse the NEO account forthe balance of payments. However, since NEO cannot serve as a reliableinstrument for addressing current account deficits, governments shouldimplement structural solutions rather than employing short-term fixes.

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