AS THE FIRST STAGE in the development of a monetary analysis of income and imports, an earlier study1 derived a simple theoretical model of countries’ economies in which monetary and balance of payments developments were integrated. That study led to certain general conclusions about the effects of credit expansion and of changes in exports that, it was believed, would be helpful in understanding the developments with which one is often faced in the study of individual countries. For the most part, the conclusions did not involve the use of numerical coefficients pertinent to particular countries.
The model can, however, be of greater use if it is given statistical content relevant to particular countries. It should then provide an explanation, in numerical terms, of the fluctuations in a country’s income, imports, money, and international reserves on the basis of data for that country’s exports, capital imports, and credit creation. Insofar as this explanation provides a satisfactory approximation of the actual development in the past of the variables explained, the same model is usable in connection with decisions of economic policy: given a country’s past exports, capital imports, and credit creation, the model can be used to compute the amount of credit creation which, together with certain estimated values for exports and capital imports, will lead to the attainment of certain desired levels of income and reserves.
To make the model suitable for the quantitative treatment of developments in individual countries requires the clarification of a number of statistical questions in order that the data may be arranged as nearly as possible in accordance with the concepts of the theory. This includes the proper definition, for our purposes, of such terms as imports, money, etc. It also requires some expansion of the theory, in order to come closer to a full explanation of the facts. To establish as firmly as possible the general elements in the theory, it is usually helpful to be able to show what specific other factors are the causes of the developments in the observed data that cannot be attributed to these general elements.
Part I of this paper is therefore concerned with the practical problems that arise in connection with this empirical work—the arrangement of the data to accord with the theory and some expansion of the theory to increase its usefulness in explaining the facts. The paper does not deal with the interpretation of the statistical results or with the qualifications that necessarily apply to this interpretation. Some of the latter were mentioned in the 1957 paper.
Part II shows the results obtained by applying the model to 39 countries, generally from 1948 or 1949 to 1958. The calculations in Part II are not intended to provide a definitive study of the application of the model to any one country. It is entirely probable that a more intensive study of the monetary structure and payments data for a particular country would lead to refinements that would improve the results. The purpose of the presentation is rather to assess the general applicability of the model by presenting the preliminary results of its application to as many countries as possible.2