Implications of the World’s Cash Flow Constraints

Harland Wm. Whitmore

Chapter 14 in The World Economy, Population Growth, and the Global Ecosystem, 2007, pp 265-275 from Palgrave Macmillan

Abstract: Abstract Every sector in every country faces a cash flow (budget) constraint. The cash flow constraints facing the individual sectors in a country, when aggregated across that country’s sectors, yield a community or countrywide cash flow constraint. The terms in this constraint may then be arranged to produce an equation that may be interpreted as a form of Walras’s Law. In general, Walras’s Law states that in a model containing n markets, the sum of the excess demands across the n markets must be equal to zero identically. In particular, if n-1 markets happen to be in equilibrium (characterized by excess demands equal to zero in those markets), then the nth market must also be in equilibrium. In the present context, it states that the excess demand for the money issued in that country plus the excess demand for bonds issued in that country plus that country’s ex ante balance of payments deficits with each of the other two countries must be equal to zero identically. Importantly, the excess demands in the product markets do not appear explicitly in the community’s budget constraint and therefore do not appear in the corresponding statement of Walras’s Law for that country. The reason is that since the imperfectly competitive firms decide production and announce product price before product demand is revealed, they may experience unplanned changes in inventories by the end of the period. Since the firms do not engage in net business saving in this model, they absorb the excess supply or demand for their product by financing (or reducing their end-of-period debt) in their own bond market the unplanned investment or disinvestment. Consequently, any excess demand in a product market automatically becomes incorporated in that country’s bond market.

Keywords: Exchange Rate; Interest Rate; Cash Flow; Budget Constraint; World Economy (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-60730-9_14

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DOI: 10.1057/9780230607309_14

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