Balance of Payments Adjustment: Macro Facets of by Augustine C. Arize, Theologos H. Bonitsis, Ioannis

By Augustine C. Arize, Theologos H. Bonitsis, Ioannis Kallianiotis, Krishna Kasibhatla, John Malindretos

A close research of the 2 methods, financial and conventional Keynesian, to foreign adjustment and stability of funds.

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Additional resources for Balance of Payments Adjustment: Macro Facets of International Finance Revisited

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Michael Mussa (1976) cites the case of Saudi Arabia which had experienced substantial improvements in its terms of trade after the oil price increases in 1972. According to Mussa the improvement in the balance of payments was the result of governmental policy which, with the improved revenue, required the government to print much less money to finance its expenditures than would otherwise have been needed. This tight monetary policy was the key to the balance of payments surplus. This is an example of a real variable (Terms of Trade—T/T) working through a nominal variable (monetary policy) to affect the balance of payments.

The nonreserve country holds zero currency of the reserve country. 2. Reserves are held as interest-earning securities. 3. The acquisition of reserves by the monetary authority of the nonreserve country is achieved through the borrowing or selling of securities in the reserve currency country. 4. The domestic currency changes by the central bank of the nonreserve country comprise a net addition to the money supply of the country. If the nonreserve currency country pursues an expansionary monetary policy, the money supplies of both countries will remain the same.

Even if central banks do not fix the value of these currencies, currency substitution will imply capital movements, and thus monetary interdependence. 2. Inflation is an integrated phenomenon in an integrated world, and price increases are transmitted internationally. 3. The presence of currency substitution will distort the balance of payments adjustments, which could partially explain the large statistical discrepancies in balance of payment statistics. Currency Devaluation The composition of the portfolio to include foreign as well as domestic currency will be reevaluated following a currency devaluation.

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