Keynesian and Contemporary Balance of Payments Models

Leonard Gomes
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Leonard Gomes: University of Middlesex

Chapter 5 in The International Adjustment Mechanism, 1993, pp 229-261 from Palgrave Macmillan

Abstract: Abstract Keynesian balance of payments adjustment analysis predominated inpostwar writings on international monetary and financial economicsup to the late 1960s against an isolated rearguard defence of thetraditional theory of international monetary equilibrium by RobertMundell and Jacques Polak.Keynes’s General Theory is, of course, a sketchy but neverthelesspenetrating analysis of the macroeconomic coordination failures of adecentralised (capitalist) closed economy, notably a failure to achievethe full employment of all resources - failures resulting fromdisequilibrium prices when ‘effective demand’ is deficient, uncertaintyof expectations and the volatility of private investment. From thatperspective, money and interest were of only secondary concern. Butthe immediate reaction to Keynes’s work was one which regarded it asa macroeconomic theory concerned with the determination of incomeand employment when prices (in particular, the money wage-rate andthe interest rate) do not adjust to clear markets.An early analytical development was the application of Keynesianmultiplier theory to the mechanism of international adjustment byMetzler, Harrod and Machlup and the criterion for exchange stabilitydeveloped by Joan Robinson and Abba Lerner. This developmentembraced (1) a theory of automatic balance of payments adjustmentsunder fixed exchange rates and (2) a theory of flexible exchange rates;or, more accurately, a theory about official manipulation of a peggedexchange rate to preserve balanced trade (the so-called ‘elasticitiesapproach’). In the second theory, exchange stability is analysed interms of elasticities of demand for and supply of imports and exports.

Keywords: Exchange Rate; Monetary Policy; Real Exchange Rate; Money Supply; Trade Balance (search for similar items in EconPapers)
Date: 1993
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DOI: 10.1057/9780230375420_5

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