Money Versus Credit in the Determination of Output for Small Open Economies

International Monetary Fund

No 1989/078, IMF Working Papers from International Monetary Fund

Abstract: It is well known that in a small open economy where there is perfect substitutability between domestic and foreign assets and costless portfolio adjustment, the monetary authorities cannot control the money supply, but can influence the balance of payments through the use of domestic credit. It has been argued that domestic credit is therefore the relevant variable in output determination as well. However, this paper demonstrates, using a “new classical” structural model, that under the conditions that render the money supply uncontrollable, neither money nor domestic credit affects output. If either has a significant effect in empirical tests, it implies that the assumption of perfect capital mobility is not satisfied.

Keywords: WP; nominal GDP; monetary policy; price level; traded goods; output equation; money supply; output effect; foreign exchange; aggregate demand; exchange rate; balance of payments; traded goods price; goods output; Domestic credit; Credit; Monetary base; Real interest rates; Personal income; Central America (search for similar items in EconPapers)
Pages: 32
Date: 1989-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1989/078

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