The Economics of Exchange Rates (Collected Works of Harry Johnson)

CHAPTER 10

A STOCK ADJUSTMENT APPROACH TO MONETARY POLICY AND THE BALANCE OF PAYMENTS

JUNICHI UJIIE

The Normua Securities Co., Ltd.Institutional Research and Advisory Department

I. INTRODUCTION

“Equilibrium” in the balance of payments (defined as a zero reserve money flow without restriction on external transactions) has been widely accepted as an appropriate objective of monetary policy in economies under the fixed exchange-rate system. Eminent examples can be found in the Keynesian (or Meade-Tinbergen-Mundellian) policy mix literature, in which balance-of-payments equilibrium is usually chosen as one of the prime policy objectives.¹ Also in empirical studies of reaction functions of monetary authorities (endogenous monetary policy), a balance-of-payments ...