On Passive Money, Exchange Rates and Monetary Leadership
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On Passive Money, Exchange Rates and Monetary Leadership
Credit and Capital Markets – Kredit und Kapital, Vol. 15 (1982), Iss. 2 : pp. 251–258
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Olivera, Julio H. G.
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Abstract
On Passive Money, Exchange Rates and Monetary Leadership
In this paper the relation is examined between the variability of the exchange rate and the national control over the domestic money supply under the hypothesis that the international money stock is not a datum but is continually adjusted to market demand (the “needs of trade criterion” or “demand standard”). It is shown that, under this hypothesis, one and only one country may determine both its national money supply and its exchange rate in international monetary units, whereas all the other countries must choose between fixing their money supplies and pegging their exchange rates. It is verified, moreover, that the monetary mechanisms associated with the resulting world equilibrium are qualitatively stable, a property which, under otherwise identical assumptions, does not obtain if the international money supply is rigid.