The Monetary Approach to International Adjustment

The Monetary Approach to International Adjustment

The Monetary Approach to International Adjustment

The Monetary Approach to International Adjustment

Excerpt

Bluford H. Putnam D. Sykes Wilford

The modern theory of international adjustment--the monetary approach--has been developing through both the Bretton Woods fixed exchange rate period and the present flexible rate regime, but its genesis is embedded in the history of economic thought. History provides the roots of the theory needed to appreciate fully the flowering of this literature.

As many authors have noted, the monetary approach traces its roots back to David Hume classic essay, Of the Balance of Trade, in his Essays, Moral, Political and Literary, published in 1752. The concepts that there is automatic adjustment of the balance of payments, that the existence of expected arbitrage possibilities would in itself lead to speculative arbitrage and then to purchasing-power parity, and that a country's stock of money is determined by demand factors not under the control of authorities--all these are fundamental implications of the monetary approach and are contained in Hume's essay. Indeed, Hume had much more to contribute to balance of payments theory than just the price-specie-flow mechanism so often recounted in economic texts. Thus, before moving on to the present-day extensions of Hume's work, a close . . .

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