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

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

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The Monetary approach differentiates extensively between real and monetary variables, stocks and flows, country sizes and speed of adjustment following monetary policy action and currency devaluation. Adjustments under the Monetary approach take place through the money markets and the portfolio adjustments of residents following a disturbance. The ORTB is the key balance, and both the capital account and the current account are of secondary importance. The introduction of currency substitution introduces an element of monetary interdependency, while the separation between reserve and nonreserve currency countries differentiates between the potency of monetary actions by various countries.

The specie flow mechanism seeks adjustment through relative changes in commodity prices, while the Monetary approach seeks adjustment through a stable demand for money. The Monetary approach thus revolves around the basic premise that over the long run, there is a stable demand for money as a stock. Surpluses or deficits in the balance of payments reflect stock disequilibria 16 A Theoretical Review between the demand and the supply of money. The specific composition of these inflows/outflows is secondary to the monetary theory.

Johnson. ’’ In The Monetary Approach to the Balance of Payments, ed. J. A. Frenkel and H. G. Johnson. Toronto: University of Toronto Press, 1976, pp. 23–24. Friedman, Milton. ’’ American Economic Review, 58, no. 1 (March 1958): 1–17. Gray, H. Peter. An Aggregate Theory of International Payments Adjustment. London: Macmillan, 1974, ch. 2. Gray, H. Peter. ’’ Unpublished manuscript, Douglass College, Department of Economics, Rutgers University, 1976. Grubel, Herbert G. ’’ American Economic Review, 58, part 1 (December 1968): 1299–1314.

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