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On the Adequacy or Inadequacy of Keynesian Balance-of-Payments Theory: A Rejoinder


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  • Willem H. Buiter
  • Jonathan Eaton


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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1032.

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Date of creation: Nov 1982
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Handle: RePEc:nbr:nberwo:1032

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  1. William H. Branson, 1970. "Monetary Policy and the New View of International Capital Movements," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(2), pages 235-270.
  2. Turnovsky, Stephen J., 1976. "The dynamics of fiscal policy in an open economy," Journal of International Economics, Elsevier, vol. 6(2), pages 115-142, May.
  3. Rudiger Dornbusch & Jacob A. Frenkel, 1982. "The Gold Standard and the Bank of England in the Crisis of 1847," NBER Working Papers 1039, National Bureau of Economic Research, Inc.
  4. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis," NBER Working Papers 0832, National Bureau of Economic Research, Inc.
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