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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

Abstract

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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  • Willem H. Buiter & Jonathan Eaton, 1982. "On the Adequacy or Inadequacy of Keynesian Balance-of-Payments Theory: A Rejoinder," NBER Working Papers 1032, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1032
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    1. Miller, Norman C, 1981. "Keynesian Balance of Payments Models: Comment [On the Almost Total Inadequacy of Keynesian Balance-of-Payments Theory]," American Economic Review, American Economic Association, vol. 71(4), pages 778-783, September.
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    5. 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.
    6. Kuska, Edward A, 1978. "On the Almost Total Inadequacy of Keynesian Balance-of-Payments Theory," American Economic Review, American Economic Association, vol. 68(4), pages 659-670, September.
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