Abstract
The monetary approach to the balance of payments is an analytical formulation which emphasizes the interaction between the supply and the demand for money in determining the country’s overall balance of payments position. It could be seen as an extension, to the case of an open economy, of traditional closed-economy monetary theory, which stresses the stability of the money demand function and considers the various channels through which changes in the money supply affect the economy. If changes in the money supply are not matched by equivalent changes in demand, then a stock disequilibrium arises. In responding to the stock disequilibrium, individuals alter their spending patterns. These adjustments are subject to the budget constraints which link the excess flow supply of money to the corresponding excess flow demand for goods and services. In a closed economy nominal income rises and interest rates may change so as to eliminate the disequilibrium in the money market; the increase in prices, and possibly output, in conjunction with the change in interest rates, raises the nominal demand for money to a level equivalent to the rise in the nominal money stock.
JEL Classifications
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsBibliography
Alexander, S.S. 1952. Effects of a devaluation on a trade balance. IMF Staff Papers 2: 263–278.
Frenkel, J.A., and H.G. Johnson, eds. 1976. The monetary approach to the balance of payments. London/Toronto: Allen & Unwin/University of Toronto Press.
Frenkel, J.A., and M.L. Mussa. 1985. Asset markets, exchange rates and the balance of payments. In Handbook of international economics, ed. R.W. Jones and P.B. Kenen, vol. II. New York: Elsevier.
International Monetary Fund. 1977. The monetary approach to the balance of payments. Washington, DC: International Monetary Fund.
Kreinin, M., and L. Officer. 1978. The monetary approach to the balance of payments: A survey, Princeton Studies in International Finance No. 43. Princeton: Princeton University Press.
Meade, J.E. 1951. The theory of international economic policy, vol. I. The balance of payments. Oxford: Oxford University Press.
Mundell, R.A. 1968. International economics. New York: Macmillan.
Mundell, R.A. 1971. Monetary theory. Pacific Palisades: Goodyear Publishing Company.
Author information
Authors and Affiliations
Editor information
Copyright information
© 2018 Macmillan Publishers Ltd.
About this entry
Cite this entry
Blejer, M.I., Frenkel, J.A. (2018). Monetary Approach to the Balance of Payments. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_761
Download citation
DOI: https://doi.org/10.1057/978-1-349-95189-5_761
Published:
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-95188-8
Online ISBN: 978-1-349-95189-5
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences