Ball, R. J.; Burns, T.; Laury, J. S. E.
March 1977
Economic Journal;Mar77, Vol. 87 Issue 345, p1
Academic Journal
The article examines the impact of an exchange rate change upon the balance of payments, financial flows, price level and expenditure components of the British economy. The monetary approach to the balance of payments has stressed the role of exchange rate adjustments as a mechanism which enables an open economy to choose its own rate of inflation rather than to accept that determined by the rest of the world. It asserts that individual exchange rate changes will have only a temporary impact upon the balance of payments but a permanent effect upon the level of foreign exchange reserves. There have been efforts to specify models which have the main characteristics of the monetarist approach to the balance of payments. Their characteristics are a demand for money function, the long-run requirement for domestic prices to be equal to world prices and the identity that the change in money supply is equal to domestic credit expansion plus the reserve change. It is of course impossible to describe in detail the alternative wage-price simulation model described. The authors have just established the general features of the model. The overall model is Keynesian to the extent that it contains a detailed specification of expenditure decisions relating to the components of the gross domestic product broken down in the familiar way as between consumption, investment, public expenditure and current account flows. The model is not constrained to produce full portfolio balance in the stationary state it ensures that model behavior is consistent with the appropriate identities relating to the flow of funds. In particular the model includes the identity that the current balance must equal the sum of the government's net acquisition of financial assets plus the financial deficit of the private sector, which is broken down between the personal and corporate sectors.


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