Monetary and Political Influences on Balances of Payments and Exchange Rates and Their Redistributive Effects

Abstract

The perspective of this study is global, viewing each nation in a multi-nation setting, and viewing the interdependencies among them as they interact with each other. Each nation-state is nonetheless a separate, sover eign entity, with authority over its geopolitical spaces, its national currency, and over its transactions with other nations. There is no global supreme authority over interna tional transactions; that authority void is shared among nations. In this study, the na tion-state, embodied with sovereignty rights, is considered the principal actor. The overall purpose of this study is to develop perspectives and methodologies for examining net redistribution of the world's commodities, financial assets and money among sovereign nations, coalitions of na tion-states and areas of the world. Each na tion within its geographical space has its own endowments and has developed its internal economy to varying degrees. By entering into international and transfer transac tions, a net redistribution of commodities, financial assets and money assets may occur. Net redistribution is reflected or proxied by changes in the various balances of the balance of payments statements and in rates. These changes are viewed as the cur rently available technical measurement of such net redistribution. The current account bilateral balances reflect the net redistribution of goods and services, the capital account bilateral balances reflect the net redistribution of financial assets, and the overall money account bilateral balances and rate changes reflect the net money redistributions which result from all international transac tions.1 The overall equation is a theoretical model used as a vehicle for discussing monetary and influences on changes in interna tional payments balances and rates. Several versions or scenarios of monetary and determinant sets are used to explain exchange market pressure, a Girton Roper term denoting the combination of changes in net overall balance of payments and in rates resulting from disequil ibrating monetary stresses.2 Four scenarios of the monetary determinant set are discussed, comparing the monetary approaches of the standard Girton and Roper model and three modifications of the model which include currency substitution concepts. The second, third, and fourth determinant sets of the over all equation represent and coalition building effects among nations, economically justified via the concept of public goods. These three variable sets represent relative price considerations, intended to reflect ex ternal price shocks and political pricing, sovereignty-based economic strength considerations, and initial coalition member ship considerations. The political-economic strength measures are empirically generated applying the methodology of control analysis (3, 1-153). These three variable sets are in dependently estimated and inserted into the overall equation. The inductive approach is employed ini tially in organizing the frame-work for view ing interdependent world transactions, at tempting techniques to develop and reveal general patterns of transactions using matrix modeling for viewing n nations, n commodi ties, n assets, n monies. This matrix modeling allows various levels of aggregations of na tions and economic activities, and adjusts easily to real world data, increasing flexibility and expanding uses of the model.