THE METHODS EMPLOYED in analyzing the effects of economic changes on a country’s balance of payments have undergone drastic revision in the course of the last 50 years. The evolution of economic ideas and analytical methods generally follows, although sometimes with a considerable lag, the emergence of economic problems requiring solution. Balance of payments analysis, too, has been influenced directly by the changing character of international economic problems; in addition, however, it has also been affected by changing methodological fashions in the mainstream of economic thought.
IN DISCUSSING MONETARY MEASURES for demand management, two interrelated questions are usually raised: first, how to evaluate the impact of changes in monetary variables on aggregate demand and, second, which monetary variable is appropriate from the viewpoint of policy. 1 In examining these questions, but mainly the second, the paper concentrates on the choice between money and credit as the policy-controlled variable—that is, whether the authorities should act (place a ceiling) on credit or on money when they intend to regulate pressures on demand, and particularly pressures on the balance of payments. 2
Delineation of sectors and financial instruments in a matrix of balance sheets for an economy is central to specifying the BSA framework for analysis of the potential for emerging liquidity or solvency problems. The sectorization and financial instruments in the 7 x 7 matrix presented in this paper provide a useful baseline for applying the BSA and can be adapted to focus on particular sectors to assess vulnerabilities in the economy. This framework can also be modified to accommodate data limitations and still be useful for vulnerability analysis.
THE PURPOSE OF THIS PAPER is to bring monetary events, monetary data, and monetary problems within the framework of income analysis, and thereby to bridge the gap between (1) the views widely held on the relation between financial policies and payments questions and (2) the analytical tools used to explain payments developments. Broadly, payments problems are associated with inflationary causes; and moderation in credit expansion is generally prescribed as a preventive or a curative of payments difficulties. But since existing analytical studies rarely succeed in integrating monetary and credit factors in the explanation of income or of payments developments, an adequate theoretical basis—in particular, a quantitative basis—for these conclusions seems to be lacking.
THE RELATION between the quantity of money and the level of prices and incomes is generally treated by modern monetary theorists in terms of a “closed” economy, that is, without allowing for international trade as an integral part of the theory. In his “Monetary Analysis of Income Formation and Payments Problems,”1 J. J. Polak has shown how the existence of international trade, and the consequent possibility of balance of payments deficits, modifies in an essential way the theoretical analysis of the monetary system.
This volume brings together several of the most important research papers on the monetary approach to the balance of payments prepared by IMF staff members. The 11 papers record, the contribution made by the IMF's staff to the development of the monetary approach, which is now widely accepted by academic economists and policymakers alike.
ABILITY TO DETERMINE the effect of changes in government policy variables on the balance of payments and income has been of major concern to policymakers in developing countries. A prerequisite to evaluating these effects is showing how income and the balance of payments are determined, since it is only then that a study can be made of the channels through which policy variables act. This paper presents a theoretical specification of a model considered relevant for analyzing the behavior of nominal income and the balance of payments in developing countries and tests the resulting model for a group of such countries. Since the model centers on the monetary aspects of income and balance of payments determination, it can be described essentially as a “monetary” model.1
In comparison with other problems of development the question of the proper management of the economy’s money may at first glance appear to be of secondary importance. Yet the history of money is full of examples of monetary disorders which have nullified