JOURNAL ARTICLE
Cite JOURNAL ARTICLE
Style
Format
A Note on External Adjustment
Credit and Capital Markets – Kredit und Kapital, Vol. 22 (1989), Iss. 3 : pp. 344–362
Additional Information
Article Details
Author Details
D. K. Fausten, Clayton, Australia
References
-
Allen, P.R. and Kenen, P.B. (1980): Asset Markets, Exchange Rates, and Economic Integration (Cambridge, Mass.: C.U.P.).
Google Scholar -
Brainard, W.C. and Tobin, J. (1968): “Pitfalls in Financial Model Building”, American Economic Review, 58 (May), 99 – 122.
Google Scholar -
Clower, R. W. (1967): “A Reconsideration of the Microfoundations of Monetary Theory”, Western Economic Journal, 6, reprinted in his Monetary Theory (Harmondsworth: Penguin, 1969), 202 – 11.
Google Scholar -
Dornbusch, R. (1976): “Expectations and Exchange Rate Dynamics”, Journal of Political Economy, 84, 1161 – 76.
Google Scholar -
Emminger, O. (1985): “The International Role of the Dollar,” Fed. Res. Bank. of Kansas City Economic Review, 70 (Sept/Oct), 17 – 24.
Google Scholar -
Fausten, D. K. (1979): “The Humean Origin of the Contemporary Monetary Approach to the Balance of Payments”, Quarterly Journal of Economics, 93, 655 – 73.
Google Scholar -
Fellner, W. (1980): “The Bearing of Risk Aversion on Movements of Spot and Forward Exchange Relative to the Dollar” in Flexible Exchange Rates and the Balance of Payments, ed. by Chipman, J. S. and Kindleberger, C. P. (Amsterdam: North-Holland), 113 – 26.
Google Scholar -
Foley, D. K. (1975): “On Two Specifications of Asset Equilibrium in Macroeconomic Models”, Journal of Political Economy, 83, 303 – 24.
Google Scholar -
Hellwig, M. (1975): “The Demand for Money and Bonds in Continuous-Time Models”, Journal of Economic Theory, 11, 462 – 4.
Google Scholar -
Johnson, H. G. (1966): “Some Aspects of the Theory of Economic Policy in a World of Capital Mobility”, in Essays in Honour of Marco Fanno, Vol. II (Padova), 345 – 59.
Google Scholar -
Kessel, R. A. and Alchian, A. A. (1962): “Effects of Inflation”, Journal of Political Economy, LXX, 521 – 37.
Google Scholar -
Keynes, J. M. (1936): The General Theory of Employment, Interest and Money (London: Macmillan & Co. Ltd.).
Google Scholar -
Koromzay, V., Llewellyn, J. and Potter, S. (1987): “The Rise and Fall of the Dollar: Some Explanations, Consequences andLessons”, Economic Journal, 97, 23 – 43.
Google Scholar -
Kouri, P. J. K. (1976): “The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run”, Scandinavian Journal of Economics, 78, 280 – 304.
Google Scholar -
Marris, S. (1984): “Managing the World Econ omy: Will We Ever Learn?”, Essays in International Finance, No.155 (Princeton Univ., International Finance Section).
Google Scholar -
McKinnon, R. 1. (1981): “The Exchange Rate and Macroeconomic Policy: Changing Postwar Perceptions”, Journal of Economic Literature, XIX, 531 – 57.
Google Scholar -
McKinnon, R. I. and Ohno, K. (1986): “Getting the Exchange Rate Right: Insular Versus Open Economies”, mimeo.
Google Scholar -
Meyer, S. A. and Startz, R. (1982): “Real Versus Nominal Forecast Errors in the Prediction of Foreign Exchange Rates”, Journal of International Money and Finance, 1, 193 – 200.
Google Scholar -
Ng, Y.-K. and Fausten, D. K. (1987): “Interest-Rate Parity and Divergence of Views on Exchange-Rate Changes: An Upward-Sloping Supply Curve of Funds even for a Small Country”, mimeo.
Google Scholar -
Patinkin, Don (1965): Money, Interest, and Prices, 2” ed. (New York: Harper and Row).
Google Scholar -
Ruffin, R. J. and Rassekh, F. (1986): “The Role of Foreign Direct Investment in U.S. Capital Outflows”, American Economic Review, 76, 1126 – 30.
Google Scholar -
Sachs, J. D. (1981): “The Current Account and Macroeconomic Adjustment in the 1970s”, Brookings Papers on Economic Activity, No.1, 201 – 68.
Google Scholar -
Tobin, J. and de Macedo, J. B. (1980): “The Short-Run Macroeconomics of Floating Exchange Rates” in Flexible Exchange Rates and the Balance of Payments, ed. by Chipman, J. S. and Kindleberger, C. P. (Amsterdam: North Holland), 5 – 28.
Google Scholar -
Tsiang, S. C. (1977): “The Monetary Theoretic Foundation of the Modern Monetary Approach to the Balance of Payments”, Oxford Economic Papers, 319 – 38.
Google Scholar
Abstract
A Note on External Adjustment
Exchange rates are determined by the interaction between the financial and real sectors of the economy. Alternative preoccupation with either assets markets or goods markets is unlikely to yield a meaningful explanation of balance of payments or exchange rate behaviour. In order to trace the implications of this interdependence for short-run adjustment behaviour, real assets are included in portfolios together with financial assets. Portfolio balance behaviour is animated by income as well as by relative yields, giving rise to the phenomenon of the “income-mobility” of international capital movements in addition to their “interest-mobility”. Disturbances initiate asset substitutions that are not confined to financial markets but that affect the real sector directly, and generate simultaneous and mutually compatible changes on current and on capital account. Any residual imbalances between the component accounts are eliminated by exchange rate changes which, consequently, do not display a stable relationship with movements in either component account.