Determination Of Monetary Policy Research Articles

U.S. MONETARY POLICY AND THE BALANCE OF PAYMENTS, 1950-60*

SINCE THE WORLD-WIDE revival of flexible monetary policy in the early 1950's, European nations have used the state of the balance of payments as a major determinant of monetary policy. They have employed a restrictive policy when reserves were low, to curb imports, divert production to exports, and encourage capital inflows. In the period under study, 1950-60, the United States experienced a chronic balance-of-payments deficit, yet its monetary policy was oriented to domestic considerations. In addition, United States business cycles differed in timing and intensity from European cycles. These factors led at times to wide differentials between United States and foreign interest rates. These interest-rate differentials caused persistent outflows of shortterm capital and lending on foreign dollar bonds. The net outflow from these two sources was $4.6 billion in the years 1951-59, about one-third of the net balance-of-payments deficit over the nine-year period. Interest rates more nearly in line with those of other countries would have prevented at least some of this outflow, which was greatest during periods of widest interest-rate differentials. However, one major component of United States capital flows-direct investment-fluctuated with the domestic business cycle and consequently was not sensitive to interest-rate differentials. Foreign capital in this country showed less direct sensitivity to interest rates than did United States capital. Interest rates affected foreign short-term capital indirectly by influencing other elements in the balance of payments, but these capital movements did not generally react independently of interest-rate differentials. Interest-rate changes did, however, cause shifts between foreign and official holders of dollars and among different types of dollar assets. Gold movements were also affected only indirectly by monetary policy, through its influence on other balance-of-payments items in determining the side of the deficit. Foreign long-term capital in the United States showed some direct sensitivity to interest rates, but the magnitudes of these flows were small.

MONETARY POLICY AND ECONOMIC STABILITY SPEED AND SCALE OF ACTION*

THE POSTWAR RENAISSANCE of central bank policy reflects the enduring significance of the monetary equation for the economy as a whole. Although the accumulated evidence indicates that central banking has not eliminated economic fluctuations, optimum usage has rarely, if ever, occurred and perhaps has not even been described. Yet, without the inclusion of the appropriate monetary measures, the problems of stabilization policy would be seriously compounded. Although many changes have taken place since the days when the central bank held unchallenged leadership as the agency of stabilization policy, tempering economic fluctuations through monetary controls continues to be an integral part of our efforts to tame the cycle. As contrasted with the classical central banking problem, gold movements no longer provide a useful guide to changes in policy. Recently, we experienced a substantial gold inflow during a boom and large drain in the slump-hardly a serviceable basis for policy. In the United States the size of the gold stock has contributed to the decline of international monetary considerations as a leading guide to central bank policy; this is not to say that such factors are inherently or permanently unimportant here. Elsewhere, international money flows continue to have considerable importance and frequently follow a more orthodox pattern. For such countries, adverse movements of funds can be a powerful determinant of monetary policy. However, the conclusions drawn in this paper bear on central banking policies where they are not immediately responsive to international money flows, mainly the United States. With gold movements largely eclipsed as a determinant of central bank actions, emphasis in recent years has been placed on internal guides and domestic considerations. This adds certain elements of novelty to the monetary problem. The classicists envisaged a situa-