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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.

Suggested Citation

  • 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 Note: ITI IFM
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    1. William H. Branson, 1970. "Monetary Policy and the New View of International Capital Movements," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(2), pages 235-270.
    2. Rudiger Dornbusch & Jacob A. Frenkel, 1984. "The Gold Standard and the Bank of England in the Crisis of 1847," NBER Chapters,in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 233-276 National Bureau of Economic Research, Inc.
    3. 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.
    4. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis," NBER Working Papers 0832, National Bureau of Economic Research, Inc.
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