Monetary Equilibrium and Balance-of-Payments Adjustment: An Empirical Test of the U.S. Balance of Payments, 1951-73

Abstract

SINCE THE 1960s, there has been a renewal of interest in classical theory of balance of payments, with important contributions by Johnson [4] and Mundell [7, 8]; resulting modern version is known as the monetary to balance-of-payments theory. The pioneering work of Johnson and Mundell has been followed by a number of theoretical refinements and by several empirical tests of theory for small countries [2]. This paper presents an empirical test of a large country case, viz. United States in period 1951-73. Section 1 sets out a simple two-area model of world from which U.S. balance-ofpayments equation is derived. The empirical tests of this equation are discussed in section 2. The monetary approach considers balance-of-payments deficits and surpluses as stock adjustments to money market disequilibrium, or as continuous flow disturbances resulting from ongoing stock adjustments. The most important assumptions