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

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

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

Example text

Nondistinction of the Different International Accounts The Monetary approach, unlike the Traditional approach, does not differentiate among the various accounts or attempt to explain their individual behavior. Accounts such as goods and services, long-term capital, and short-term capital are lumped together into one, ‘‘above-the-line’’ category. The official reserve transaction balance is the ‘‘below-the-line’’ category, and it represents, for the monetarists, the preeminent account. ’’ An ORTB surplus may be associated with either surpluses in either the capital or the current accounts, and the reverse also holds true.

The higher prices will force the residents of the importing nation to increase their demand for nominal money balances in order to maintain the same level of real balances. The adjustment will take place through money inflows from abroad, leading to an improvement in the balance of payments. The higher prices of imports could also stimulate domestic production as domestic producers expand and/or start production, thus increasing the level of domestic incomes and the demand for real balances. The higher demand for real balances will lead to an inflow of money from abroad and an improvement in the balance of payments.

Income, however, relates negatively to the trade balance as stipulated by the Traditional approach. If the balance of payments improves and the trade balance deteriorates following a growth in income, it means that the improvement in the capital account will more than offset the deterioration of the trade balance. Interest Rate The interest rate and the demand for money are negatively related. As the interest rate rises, the quantity of money that is demanded falls, which results in an excess supply of money.

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