IDEAS home Printed from https://ideas.repec.org/a/eis/articl/105makin.html
   My bibliography  Save this article

A Monetary Model of Exchange Rate and Balance of Payments Adjustment

Author

Listed:
  • A J Makin

Abstract

This article proposes an alternative monetary model for examining the effects of domestic monetary shocks on the exchange rate and the balance of payments. Using an output-expenditure framework, it shows that domestic monetary shocks can drive a wedge between national expenditure and production and generate incipient current account imbalances with exchange rate and balance of payments implications. Contrary to previous monetary approaches, the model suggests a new chain of causality that runs from domestic money to the exchange rate to the price level, rather than from money to the price level to the exchange rate. It also shows that under fixed rates external adjustment is consistent with money market equilibrium and price level stability.

Suggested Citation

  • A J Makin, 2005. "A Monetary Model of Exchange Rate and Balance of Payments Adjustment," Economic Issues Journal Articles, Economic Issues, vol. 10(1), pages 25-36, March.
    • Handle: RePEc:eis:articl:105makin
    as

    Download full text from publisher

    File URL: http://www.economicissues.org.uk/Files/105Makin.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
    2. repec:bla:scandj:v:78:y:1976:i:2:p:200-224 is not listed on IDEAS
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, April.
    4. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 421-445.
    5. Anthony J. Makin, 2004. "The Current Account, Fiscal Policy, and Medium‐Run Income Determination," Contemporary Economic Policy, Western Economic Association International, vol. 22(3), pages 309-317, July.
    6. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845, September.
    7. Sidney S. Alexander, 1952. "Effects of a Devaluation on a Trade Balance," IMF Staff Papers, Palgrave Macmillan, vol. 2(2), pages 263-278, April.
    8. Bruce, Neil & Purvis, Douglas D., 1985. "The specification and influence of goods and factor markets in open-economy macroeconomic models," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 16, pages 807-857, Elsevier.
    9. MacDonald, Ronald, 1999. "Exchange Rate Behaviour: Are Fundamentals Important?," Economic Journal, Royal Economic Society, vol. 109(459), pages 673-691, November.
    10. Rogoff, Kenneth, 1999. "Monetary Models of Dollar/Yen/Euro Nominal Exchange Rates: Dead or Undead?," Economic Journal, Royal Economic Society, vol. 109(459), pages 655-659, November.
    11. J. J. Polak, 1957. "Monetary Analysis of Income Formation and Payments Problems," IMF Staff Papers, Palgrave Macmillan, vol. 6(1), pages 1-50, November.
    12. repec:bla:scandj:v:84:y:1982:i:2:p:147-59 is not listed on IDEAS
    13. Johnson, Harry G., 1977. "The monetary approach to the balance of payments : A nontechnical guide," Journal of International Economics, Elsevier, vol. 7(3), pages 251-268, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ozawa Terutomo & Van den Berg Hendrik & Lewer Joshua J. & Krol Robert & Makin Anthony J., 2001. "Global Economy Quarterly, Issue 1," Global Economy Journal, De Gruyter, vol. 2(1), pages 109-109, December.
    2. Anthony J. Makin, 2013. "The policy (in)effectiveness of government spending in a dependent economy," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 16(3), pages 287-301, September.
    3. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    4. Makin Anthony J, 2005. "Feasible Limits for External Deficits and Debt," Global Economy Journal, De Gruyter, vol. 5(1), pages 1-16, March.
    5. Habib Ahmed & C. Paul Hallwood & Stephen M. Miller, 2006. "The Exchange Rate-Investment Nexus and Exchange Rate Instability: Another Reason for 'Fear of Floating'," Working papers 2006-15, University of Connecticut, Department of Economics, revised Jan 2009.
    6. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 74-91, Winter.
    7. Carlos Borondo, "undated". "International Transmission of Monetary Shocks with Interest Rate Rule," Working Papers on International Economics and Finance 00-04, FEDEA.
    8. S Da Silva, 2002. "A Classroom Guide to the Equilibrium Exchange Rate Model," Economic Issues Journal Articles, Economic Issues, vol. 7(2), pages 1-10, September.
    9. Constantino Hevia & Juan Pablo Nicolini, 2013. "Optimal Devaluations," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 22-51, April.
    10. M. Ali Kemal & Rana Murad Haider, 2004. "Exchange Rate Behaviour after Recent Float: The Experience of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 829-852.
    11. Ghironi, Fabio, 2008. "The role of net foreign assets in a New Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1780-1811, June.
    12. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    13. Marc Hofstetter, 2007. "Disinflating From Moderate Inflation," Documentos CEDE 2373, Universidad de los Andes, Facultad de Economía, CEDE.
    14. Cuiabano, Simone, 2017. "Long-run equilibrium exchange rate in Latin America and Asia: a comparison using cointegrated vector," TSE Working Papers 17-837, Toulouse School of Economics (TSE).
    15. Makin, Anthony J., 1998. "A dependent economy model of public expenditure and the exchange rate," International Review of Economics & Finance, Elsevier, vol. 7(4), pages 453-463.
    16. Anthony J. Makin, 2007. "Re‐Examining The Effectiveness Of Stabilisation Policy," Australian Economic Papers, Wiley Blackwell, vol. 46(4), pages 348-359, December.
    17. Makin, Anthony J. & Rohde, Nicholas, 2012. "Has Australia's floating exchange rate regime been optimal?," Economic Modelling, Elsevier, vol. 29(4), pages 1338-1343.
    18. Michael Paetz, 2007. "Robust Control and Persistence in the New Keynesian Economy," Quantitative Macroeconomics Working Papers 20711, Hamburg University, Department of Economics.
    19. Makin, Anthony J. & Narayan, Paresh Kumar & Narayan, Seema, 2014. "What expenditure does Anglosphere foreign borrowing fund?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 63-78.
    20. Barbara Rossi, 2013. "Exchange Rate Predictability," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1063-1119, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eis:articl:105makin. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dan Wheatley (email available below). General contact details of provider: https://edirc.repec.org/data/bsntuuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.