Dynamics of Hume's Law
David Hume formulated the oldest theory of balance of payment adjustment mechanism in 1752. In his model foreign trade is sensitive to the difference between the home and foreign price levels and that is why it is also called price - specie - flow mechanism. Hume, likewise the whole generation of classical political economists coming after him, failed to see the impact of then strong British economy on economic variables of the rest of the world and in effect he developed a model for a small economy. Although the authorship of the quantitative monetary equation is ascribed to him, Hume did not represent pure monetarism, i.e. neutrality of money. He was well aware of the transition period, during which a change in money stock affect the real economics variables. For this reason it is necessary to abandon the constant real product model. Variability of the real product in the presented models makes it possible to create different stable levels of money stock and the real product in accordance with the initial conditions. The authors are of the opinion that the balance of payment adjustment mechanism can thus be source of instability of the real sector of the economy.
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Volume (Year): 2007 (2007)
Issue (Month): 4 ()
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