Working Paper: NBER ID: w1032
Authors: Willem H. Buiter; Jonathan Eaton
Abstract: This note again refutes Kuska's proposition that equality between the demand for and supply of money ("money market equilibrium") implies equilibriumin the balance of payments.Indeed, under a regime of fixed exchange rates it is precisely the balance of payments deficit or surplus that equilibrates the money market.The refutation of Kuska's proposition does not require anyspecial assumptions about sterilisation policies,it is also established,again contrary to Kuska, that in a two country world with a fixed exchange rate,internationally mobile capital and endogenous interest rates, only one country can independently achieve a money supply target.Failure to distinguish between the change in the money stock and domestic credit expansion appears to be the source of Kuska's erroneous indictment of "Keynesian" balance-of-payments theory.We also establish the conditions under which alternative (ex-ante) balance of payments definitions can be substituted for an asset market equilibrium condition.
Keywords: Keynesian Balance-of-Payments Theory; Money Market Equilibrium; Fixed Exchange Rates
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| balance-of-payments surplus or deficit (F30) | money market equilibria (D53) |
| capital mobility (F20) | domestic credit expansion (E51) |
| domestic credit expansion (E51) | ability to control money supply (E58) |
| failure to differentiate between changes in money stock and domestic credit expansion (E51) | misinterpretations of Keynesian models (E12) |