On the Adequacy or Inadequacy of Keynesian Balance-of-Payments Theory: A Rejoinder

18 Pages Posted: 19 Jun 2004

See all articles by Willem H. Buiter

Willem H. Buiter

Citigroup New York; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University

Jonathan Eaton

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 1982

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

Buiter, Willem H. and Eaton, Jonathan, On the Adequacy or Inadequacy of Keynesian Balance-of-Payments Theory: A Rejoinder (November 1982). NBER Working Paper No. w1032. Available at SSRN: https://ssrn.com/abstract=304767

Willem H. Buiter (Contact Author)

Citigroup New York

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Jonathan Eaton

Leonard N. Stern School of Business - Department of Economics ( email )

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