Allan H. Meltzer
Two interesting papers in part 4 treat different aspects of the Eurodollar market.1 Ronald McKinnon describes some of the services performed by the market and distinguishes between money and credit. The distinction is elementary but important because it is often neglected. Neglect has given rise to incorrect inferences about the effect of the Eurodollar market on inflation, as McKinnon notes. Dale Henderson and Douglas Waldo analyze the effect of putting reserve requirements on Eurodollars. They show that, in a model with a single rate of interest and fixed exchange rates, reserve requirements on Eurodollars reduce the variance of the money stock -- demand deposits and currency -- around its target value. With fluctuating exchange rates, the result is ambiguous. One point should be emphasized but is not: The effect of reserve requirements on Eurodollars depends on monetary and other institutional arrangements and on assumptions about the new substitutes that will develop in response to the change. McKinnon points out that taxation of interest payments, liberalization of trade, and other arrangements cannot be neglected.
Intermediation. Intermediation produces differences between money, defined as currency and demand deposits, and bank credit, defined as the earnings assets of all banks. To show how Eurodollars affect bank credit and money, I start from the consolidated balance sheet.2 Let R be bank reserves, E be bank earning assets (credit), and D and T be demand and time deposits, respectively. Then,
|E = D + T - R||(1)|