Working Paper: NBER ID: w1127
Authors: Michael R. Darby
Abstract: This paper discusses recent evidence on the imperfect international substitutability of goods and assets and the implications for conduct of monetary policy in a major industrial country. A simple model is developed for analysis of the simultaneous determination of money growth and the balance of payments under pegged exchange rates. Parallels are drawn to the importance of expected depreciation in determination of floating exchange rates. An assessment is made of the extent to which a central bank can simultaneously pursue both exchange rate and money supply goals through sterilized intervention. The paper concludes with the role of saving rate differences in determining nonzero equilibrium trade balances.
Keywords: Monetary Policy; International Economics; Exchange Rates
JEL Codes: E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Balance of payments (F30) |
| Interest rates (E43) | Capital flows (F32) |
| Capital flows (F32) | Monetary policy effectiveness (E52) |
| Pegged exchange rates (F31) | Monetary policy impotence (E49) |
| Balance of payments (F30) | Domestic interest rate (E43) |
| Monetary policy (E52) | Trade balance adjustments (F32) |