Abstract

Short-term Capital Movements, Money Market Equilibrium and the Effectiveness of Monetary Policy

One of the most important conclusions of the monetary theory of the balance of payments is that in a system of fixed exchange rates the attempt of a country to pursue a monetary policy independentiy of the rest of the world must be abortive. Attempts at empirical verification of this conclusion also for the short run have brought contradictory results to some extent. However, the estimators used were often not substantiated theoretically. On the other hand, where the econometric study was based on a theoretical model the results were misleading in many instances on account of choosing an unsuitable estimation period and/or budget restriction, because the causal relationship among variables was not susceptible of unequivocal clarification. The present study attempts to avoid these defects. First, a theoretical model is evolved, which concentrates on equilibrium in the money market. 'Then, various deliberations are undertaken with regard to the nature and responsiveness of the central bank’s monetary policy actions, and their relevance to theoretical and empirical investigation of short-term capital movements are examined. Lastly, the model is subjected to empirical testing. It proves that the central bank of an open economy has a better chance of pursuing an effective short-term monetary policy with quantitative measures than with qualitative measures.