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On the Monetary Approach to the Balance of Payments

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  • Arman Mansoorian

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Abstract

The effects of inflation are considered for a small open economy with overlapping generations and a cash-in-advance constraint on consumption. In an endowment economy with one good, the model recovers the adjustment mechanism underlying the monetary approach to the balance of payments, which incorporated the real balance effect in the savings function. Nevertheless, if the model has two goods that require different degrees of cash, the factor intensities of the goods also play a crucial role in determining the response of savings. In that case, the predictions of the monetary approach may be overturned; a result that is supported numerically. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Arman Mansoorian, 2014. "On the Monetary Approach to the Balance of Payments," Open Economies Review, Springer, vol. 25(4), pages 721-737, September.
  • Handle: RePEc:kap:openec:v:25:y:2014:i:4:p:721-737
    DOI: 10.1007/s11079-013-9293-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Cash-in-advance; Overlapping generations; Real balance effect; Current account; F32; F41;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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