The monetary approach to the balance of payments

This is a review article of the theoretical papers in The Monetary Approach to the Balance of Payments, edited by Jacob A. Frenkel and Harry G. Johnson. The paper concentrates on: (a) The difficulties which there appear to be in the theoretical models used as a main vehicle of analysis and (b) the question of whether and in what circumstances the excess demand for financial assets is equivalent to the balance of payments. It is argued that the main contribution of the 'Monetary Approach' is that it alerts us to the important stock flow distinctions which must be made when account is taken of the effect of the balance of payments on the stock of financial assets.     

A model of the balance of payments

A model of the balance of payments is presented in this paper in which stock and flow effects are completely integrated. The model accounts for all flows of funds in the system and allows for the endogenous determination of the exchange rate. The model is first outlined in general terms and then a particular ‘quasi-empirical’ version of it is analyzed by means of simulation techniques. The results of analyzing this version show the likely importance of accounting for capital flows and price linkages among countries in the construction of multicountry econometric models.     

The impact of petroleum on the balance of payments

Nigeria’s transformation from a predominantly agricultural to an oil economy has had many significant social and economic effects. In this paper, an attempt is made to analyse one of such effects: the impact on the country’s balance of payments.     

浅析我国国际收支

20011年4月10日,海关总署发布的数据显示我国第一季度出现10.2亿的贸易逆差,这是自2004年以来,出现的首个季度逆差.但在在各方密切注视之下,中国6月份的贸易顺差猛增至222.7亿美元.虽然6月进口的增速回落明显快于出口,但不可否认的是近年来贸易顺差一直是我国国际收支的大问题.     

A simple approach to international monetary policy coordination

This paper analyzes the strategic interaction between the monetary policymakers of two countries, in an intertemporal general equilibrium model with nominal rigidities and imperfect competition. It offers an excursus on non-cooperative towards cooperative solutions. In a non-cooperative equilibrium the monopolistic allocation prevails in both countries, because of the incentive to use strategically the terms of trade. In a cooperative solution where both policymakers internalize the externalities given by the terms of trade, the competitive allocation is reached. However, cooperation can be counterproductive. We then characterize a problem of delegation in which the set of choice is restricted to the Pareto efficient allocations and in which the participation constraints implied by the non-cooperative equilibrium are taken into account.     

A monetary approach to measuring long-run inflationary expectations

In this paper, a model of long-term monetary equilibrium is used to construct an empirical model of long-run inflationary expectations. This model is estimated and used to construct out-of-sample estimates of long-run expected inflation. Comparisons of expectations measures from this model with those from commonly-used autoregressive models and with a model drawn from the term structure clearly favors the former.     

The balance of payments and optimal economic policy: The assignment problem revisited

In this paper a policy model suggested by Niehans is extended to show the particular and non-optimal character of the so-called assignment rules in the theory of economic policy in open economies. From the assumption that the government has two arguments in its objective function — income and the exchange reserves — an optimal policy model is developed with the techniques of optimal control theory. The optimal control rules derived from this model are easily compared with the traditional assignment rules. The model also shows how rational behaviour of the policymakers could lead to the creation of a political business cycle.     

The necessity for a strategic approach to monetary policy

The Fed has a spotty track record, and its discretionary approach to conducting monetary policy will lead to the same mistakes it made in the past. I emphasize the importance of adopting a strategic framework for conducting monetary policy. The Fed has constantly changed the course of monetary policy in response to high-frequency data and other temporary factors. The Fed’s excessive monetary ease has distorted economic and financial behavior. The Fed should base its policy on longer-run objectives rather than short-run economic and financial fluctuations, and communicate these objectives to the public and to financial markets. Under the Financial Choice Act, the Fed would have to establish a strategic guideline, and explain to Congress why monetary policy may be deviating from the guideline. I respect the Fed and see the need for change to maintain its credibility. The Fed must acknowledge its shortfalls and modify its focus.     

Optimal growth and stages in the balance of payments

The standard economic development literature posits the existence of stages in the balance of payments accounts through which countries pass as part of the development process. This paper presents an optimal growth model of an open economy in which no such stage tendencies exist. It then discusses applications and implications for the real world.     

Price behavior in the light of balance of payments theories

The price predictions of the elasticity and monetary theories of balance of payments adjustment are compared with actual price behavior. Price behavior differs more from the relatively demanding monetary approach in that price levels and price movements for GDP as a whole and for specific types of export goods varied substantially even among major industrial countries. As for the elasticity approach, price levels tended to rise with appreciations and fall with depreciations, as expected.     

The employment effects of tariffs under a free exchange rate regime: A monetary approach

This paper develops a ‘monetary’ approach for the analysis of tariff policy under a free (flexible) exchange rate regime. The paper concludes that the imposition of a tariff unambiguously causes a deterioration in the level of employment under free rates even without a Laursen-Metzler effect on saving.     

International trade in oil: Effects on the balance of payments and exchange rates

Oil price increases and the persistent OPEC current account surpluses were considered the main problems of economic development in many industrial and developing countries long after the first oil crisis. Since 1983, however, the OPEC surpluses have been completely absorbed and the official base price of petroleum has fallen for the first time in twenty years, although admittedly in terms of a “strong” dollar. Has the serious damage suffered by oil-importing countries in the two oil shocks been completely neutralised, or are the economies of many countries still strongly influenced by the actions and decisions of the OPEC countries?     

Tariffs,the balance of payments,and the demand for money

This paper shows that in a small country the impact of a tariff on the balance of payments depends crutially on the role of relative prices in the demand function for money. An import (export) duty has a perverse impact on the balance of payments if importables (exportables) and money are net complements, but both import and export duties cannot have a perverse impact. A relation between the impact of export and import duties is also derived and is used to reestablish a well-known theorem of Meade on the equivalence of replacing import with export duties and currency depreciation.