Mr. Hodjera, economist in the Special Studies Division of the Research Department, has degrees from the Graduate Institute of International Studies in Geneva and from Columbia University and has also studied at Oxford University. He has been lecturer at the City College of New York, Assistant Professor at Yale University, and Visiting Associate Professor at the University of Virginia. He has contributed several articles to economic journals.
For the use of the basic balance concept in the medium-term analysis, see the chapter, “World Trade, Payments, and Reserves,” in various issues of the International Monetary Fund’s Annual Report.
For the role of basic balance in the long-term analysis and projections, see Hal B. Lary, Problems of the United States as World Trader and Banker (National Bureau of Economic Research, 1963), and Walter S. Salant and others, The United States Balance of Payments in 1968 (The Brookings Institution, Washington, 1963).
For the development of this thesis, see Charles P. Kindleberger, Balance-of-Payments Deficits and the International Market for Liquidity (Essays in International Finance, No. 46, Princeton University, 1965), and Emile Despres, Charles P. Kindleberger, and Walter S. Salant, “The Dollar and World Liquidity—A Minority View,” The Economist, February 5, 1966, pp. 526–29.
In addition, some minor transactions, such as bilateral payments agreements of Japan (see Table 5) are included.
For various views on this point, see “Unrecorded Movements in the U.K. Balance of Payments: The ‘Balancing item,’” Bank of England, Quarterly Bulletin, Vol. II (1962), pp. 16–22; The Balance of Payments Statistics of the United States: A Review and Appraisal (Report of the Review Committee for Balance of Payments Statistics to the Bureau of the Budget, April 1965), pp. 85–91; Sven Grassman, ‘The Balance of Payments Residual,” Skandinaviska Banken Quarterly Review (1967: 2), pp. 43–50; John S. Smith, “Asymmetries and Errors in Reported Balance of Payments Statistics,” Staff Papers, Vol. XIV (1967), pp. 211–36.
The balance of payments for Canada, however, does not distinguish entirely between short-term capital movements and errors and omissions, so that the latter cannot be shown separately.
Cumulative presentation also permits inspection of yearly flows of various items, which are shown in the charts as slopes of the curves from one year to the next.
See Robert Triffin, Europe and the Money Muddle: From Bilateralism to Near-Convertibility, 1947–1956 (Yale University Press, 1957), pp. 180–87, and Bank for International Settlements, Annual Reports, Chapter VIII. Since credits to the EPU were counted by the member countries as reserves, a regional balance of payments surplus did not generate a discrepancy between reserve movements and a cumulative basic balance.
As can be seen from Chart 4, the structure of Canada’s balance of payments is quite unusual for a major developed country. The deficit on the current account was financed mainly by the private long-term capital inflow, while the other components of the basic balance played minor roles. For the equilibrating role of short-term capital movements during the period of flexible exchange rates, see Rudolf R. Rhomberg, “Canada’s Foreign Exchange Market: A Quarterly Model,” Staff Papers, Vol. VII (1960), pp. 439–56, and “A Model of the Canadian Economy under Fixed and Fluctuating Exchange Rates,” The Journal of Political Economy, Vol. LXXII (1964), pp. 1–31; also Paul Wonnacott, The Canadian Dollar, 1948–1958 (University of Toronto Press, 1960), pp. 128–39.
See Table 3. It should be added that the component of short-term capital flows that includes errors and omissions (see item “All other net liabilities” in Table 3) was also quite large and, until 1967, consistently positive.
For a summary of a Dutch monetary policy during that period, see Samuel I. Katz, External Surpluses, Capital Flows, and Credit Policy in the European Economic Community, 1958 to 1967 (Studies in International Finance, No. 22, Princeton University, 1969), especially pp. 26–28, and Rodney H. Mills, Jr., “The Regulation of Short-Term Capital Movements: Western European Techniques in the 1960’s” (Board of Governors of the Federal Reserve System, Staff Economic Studies, 1968), especially pp. 15–16 and 32–33. See also Table 4. Until 1964, money supply and credit were controlled through changes in cash reserve requirements. These were later replaced by the policy on credit ceilings. To limit excessive borrowing from abroad, ceilings on net liabilities abroad by the banks were also introduced. (Each bank’s gross liabilities abroad could not exceed its gross foreign assets by more than 5 per cent.) However, large amounts of net foreign assets in the hands of commercial banks permitted them to undertake substantial borrowing abroad.
As can be seen from Charts 1 and 4, short-term capital inflows, which began in 1960, were followed until 1964 by increasingly heavy long-term borrowing abroad, mainly on the U.S. capital market. Such combined borrowing on both short-term and long-term capital accounts enabled Japan to maintain, or even slightly increase, its reserves between 1960 and 1964, despite a cumulative current account deficit of $2.1 billion.
For a detailed analysis of these fluctuations and the policy of Japan’s monetary authorities, see Hannan Ezekiel and Chandrakant Patel, “Fluctuations in Japan’s Balance of Payments and the Role of Short-Term Capital Flows, 1959–66,” Staff Papers, Vol. XIV (1967), pp. 403–32. As can be seen from Table 5, the main role in capital inflows was played by commercial banks, but after 1962 the contribution of the nonmonetary sector (mainly corporations with foreign interests) also became significant.
Katz, op. cit., pp. 18–22.
See Mills, op. cit., pp. 2–8 and 29–33, and Katz, op. cit., pp. 5–7, 41–42, and passim.
Deutsche Bundesbank, Monthly Report, February 1967, p. 27.
For Sweden, see Grassman, op. cit. In the United Kingdom, it is estimated that the trend in the cumulative balancing item reflects unrecorded current account, while the fluctuations reflect short-term capital movements. See “United Kingdom Balance of Payments in the Second Quarter of 1967,” Economic Trends, September 1967, p. xiv, and Central Statistical Office, United Kingdom Balance of Payments, 1966, p. 53.
Philip W. Bell, “Private Capital Movements and the U.S. Balance-of-Payments Position,” in Factors Affecting the United States Balance of Payments (compilation of studies prepared for the Joint Economic Committee, 87th Congress, 2nd Session, Washington, 1962, pp. 395–481); William H. Branson, Financial Capital Flows in the U.S. Balance of Payments (Amsterdam, North-Holland Publishing Co., 1968), pp. 150–51 and 175–76.
A substantial proportion of exported banknotes was, however, reinvested in Italy as a result of various incentives in the national fiscal system for investment from abroad. In order to account for this behavior, an adjustment was made in both errors and omissions and private long-term capital movements. For the method used, see the Appendix.
See pages 586–87 and the Appendix.