Balance of Payments Adjustment: Macro Facets of International Finance Revisited

Balance of Payments Adjustment: Macro Facets of International Finance Revisited

Balance of Payments Adjustment: Macro Facets of International Finance Revisited

Balance of Payments Adjustment: Macro Facets of International Finance Revisited

Excerpt

The traditional approach to international adjustment was developed in this century by theorists such as Alexander (1952), Keynes (1929), Machlup (1943), Meade (1951), Robinson (1947) and others. Because of the euphoria that resulted after World War II as a consequence of the policy recommendations of J. M. Keynes, the traditional approach was called Keynesian. However, even though many of its elements are Keynesian, the approach also differs from Keynes's framework in certain important aspects, as discussed by Malindretos (1984).

By the late 1970s a few analysts, like Frenkel, Johnson and Mundell, had established an alternative to the traditional theory, which they named the Monetary approach to the balance of payments. They expostulate that the Monetary approach is, in fact, a theory that has existed since the time of David Hume. They feel that their theory is a replacement of the Traditional approach, which they view as an insufficient theory.

This book undertakes an elaborate analysis of the two approaches to international adjustment. We divide the book into five parts. Part I looks at the two theories from a theoretical viewpoint. Chapter 1, by Ghosh and Duteil, discusses the adjustment mechanism of the Traditional approach in the case of fixed exchange rates and describes both the comparative statics and the dynamics of that adjustment. Chapter 2, by Tsanacas, Kasibhatla and Malindretos, examines the Monetary approach to international adjustment. The authors first examine the assumptions of this view: that there is full employment, the law of one price holds true, money forces essentially determine the balance of payments and general equilibrium exists. Next, the authors analyze how these axioms determine the results of the theory. The third issue on which they expound involves . . .

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