A note on some asymmetries of monetary control in open economies

Abstract

reconciliation of the divergent empirical findings about the direction of causality between money and income that have been obtained for the United States by Sims [1972] and for the United Kingdom by Williams et al. [1976] has recently been suggested by Putnam and Wilford [1978]. In those investigations the hypothesis of unidirectional causality from money to income had been found to be consistent with postwar U.S. data but not with the evidence for the United Kingdom. Putnam and Wilford's reconciliation pivots on the asymmetry between a reserve currency country and non-reserve currency members of the international monetary system. The particular asymmetry which they emphasize is the presumed ability of the reserve currency country to control its money supply, and therefore its level of nominal income, whereas the non-reserve currency countries can exercise no such control, their money supplies being determined endogenously instead through the state of the balance of payments. The rationale for this asymmetry is found in the willingness of creditor countries to hold short-term liabilities of the reserve currency country in the form of securities denominated in the latter's currency a willingness not extended to the liabilities of non-reserve currency countries. The potentially inappropriate behavior with respect to the international (dollar standard) monetary system which these divergent dispositions may precipitate or tolerate in the reserve currency country has long been recognized in some European centers. Indeed, the monetary authorities of non-reserve currency countries have on occasion been criticized for attaching priority to the profitability of their international asset portfolios at the expense of the long-run viability of the international monetary