General Discussion: What Have We Learned? Where are the Fundamental Conflicts of Opinion?

Stanley Black: Let me start by talking about what I see as the main things that we have learned. The papers of the last two days have brought us a considerable amount of understanding about (1) the relationship between stocks and flows, i.e. that the exchange rate is determined in the short run by equilibrium in markets for stocks of assets denominated in different currencies and in the long run by flow equilibrium in goods markets as indicated by purchasing power parity in the markets for traded goods. (2) Concerning the short-run equilibrium, we have learned about the relationship between, on the one hand, a monetary analysis of exchange rates focusing on the demands and supplies of different kinds of moneys, and on the other hand what has more generally been called an asset analysis of exchange rates focussing on the willingness to hold existing stocks of assets denominated in different currencies. The existing stocks of securities can only be changed (net) by flows of saving and investment, which take time. The existing amount of domestic holdings of foreign exchange can only be changed (net) by trade or service flows, which also take time. From the balance of payments we know that the current account plus the capital account—the items above the line—must equal the reserve flows below the line. The monetary approach observes the fact that under pure floating exchange rates, reserve movements and thus changes in the foreign component of the monetary base are zero.