Mr. Fleming, Assistant Director in the Research and Statistics Department, is a graduate of Edinburgh University. He was formerly a member of the League of Nations Secretariat, Deputy-Director of the Economic Section of the U.K. Cabinet Offices, U.K. representative on the Economic and Employment Commission of the United Nations, and Visiting Professor of Economics at Columbia University. He is the author of numerous articles in economic journals.
Mr. Mundell, Professor of Economics, McGill University, was formerly economist in the Special Studies Division of the Fund. He is the author of numerous articles on international trade and economic theory.
Charles A. Coombs, “Treasury and Federal Reserve Foreign Exchange Operations,” Federal Reserve Bulletin, September 1963, pp. 1216-23, and Board of Governors of the Federal Reserve System, Press Release, October 31, 1963.
For a mathematical exposition of the interrelationships determining forward exchange rates under more general assumptions, see S. C. Tsiang, “The Theory of Forward Exchange and Effects of Government Intervention on the Forward Exchange Market,” Staff Papers, Vol. VII (1959-60), pp. 75-106. See also, William H. White, “Interest Rate Differences, Forward Exchange Mechanism, and Scope for Short-Term Capital Movements,” Staff Papers, Vol. X (1963), pp. 485-503.
A change in the forward exchange rate is not, in fact, the only way in which an ex ante disequilibrium between NSP and NLP manifests itself. In the absence of a forward exchange market, such a disequilibrium would manifest itself in a change in the interest rate at which A residents lend to non-A residents (or vice versa) in A currency, compared with that at which they lend in non-A currency.
This implies that foreign residents would have had a corresponding negative (positive) net position in domestic currency on forward account.
From the standpoint of real national income, the two figures are on a very different footing. The loss of $20 million in interest is a net loss to the country even if full employment is preserved—though it may be “worthwhile” if the $500 million inflow of funds is added to the real capital of the country. The $100 million loss on the trade balance may involve no loss at all in real income if employment is preserved by a corresponding addition to domestic expenditure. Indeed, there may be a net gain from the improved terms of trade. However, both the $20 million and the $100 million are apt to generate declines in income and employment which may intensify the real loss involved. In most cases in which official intervention on the forward market in support of the domestic currency arises, a decline in competitiveness on world markets would be unwelcome.