A Monetary Approach to Balance-of-Payments Analysis

Abstract

The purpose of this paper is to set forth the general principles which characterize the to balance-of-payments analysis and to illustrate how these principles are applied in a simple model of trade and payments behavior. The exposition of general principles summarizes the three basic features of the monetary approach. At this level of generality, it is argued that a monetary approach is essential for sensible discussion of the balance of payments and that the money-demand function and the money-supply process should play a central role in balance-of-payments analysis, particularly for the long run. The monetary approach, however, is not identified with the view that only money matters, nor is it asserted that the monetary approach is encompassed in any single, specific, theoretical model. Rather, it is argued that the monetary approach encompasses a broad class of models which share certain basic features but can differ in many important respects, particularly concerning short-run processes of adjustment. After the discussion of general principles, these principles will be illustrated by considering the specific question of the effects of a tariff