Abstract

On the Monetary Relevance of Foreign Exchange Credit Balances - A Reply

According to the “functional approach”, short-term euro-deposits in the hands of domestic non-bankers should be included in the quantity of money of the country concerned. With this method the efficiency of the monetary policy of that country can be improved. The authors uphold their proposal despite the above criticism by Gerhard Maier. The objection that transactions are necessary in order to use euro-deposits for payments misses the mark in that (a) other assets - also falling within the defined limits of the quantity of money - can likewise be used for payments purposes only by incurring transaction costs, and (b) under certain circumstances euro-deposits can be used for payments in an autonomous international payments system without transaction costs accruing. Maier’s second objection, which is based on an unclear definition of eurodeposits, foreign exchange deposits and holdings of notes and coins, is applicable precisely to aggregation methods other than the “functional approach”. In contrast, the “functional approach” would lead to a highly significant definition of the monetary aggregates, as it takes exact account of the purchasing power in the hands of domestic non-bankers. In conclusion, the authors make tentative estimates of the eurodeposits held by non-bankers, using the examples of the Netherlands and the Federal Republic of Germany