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Monetary Policies and Exchange Rates

Published online by Cambridge University Press:  17 August 2016

A.P. Budd  and
P.J. Warburton
A.P. Budd
Affiliation:
London Business School
P.J. Warburton
Affiliation:
London Business School
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Extract

In this paper we set out to do three things. First we present a general, and somewhat simple, theory of the relationship between monetary policies and exchange rates. Second we present some evidence relating to the theory. Third we use the theory to discuss current relationships between European currencies and in particular examine the prospects for the European Monetary System and for the pound sterling.

The following account does not attempt to provide a realistic theory of short-term movements in the exchange rate but sets out a general approach which describes the longer-term tendencies of exchange rates. It has been described by a distinguished commentator as « naive instant monetarism ». « Naive », presumably, in the sense that it pays no attention to institutional problems and « instant » in the sense that the adjustments appear to occur instantaneously. The sense in which it is monetarist should become clear although we draw attention to one theoretical objection to the monetarist approach. We make no claim for originality for the theoretical framework.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 45 , Issue 1 , March 1979 , pp. 35 - 54
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1979 

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References

(1) The monetary theory of exchange rates and the balance of payments has a long ancestry. Its modern « re-discovery » is recorded in Johnson, H.G. « The Monetary Approach to Balance of Payments Theory » in Further Readings in Monetary Economics, London 1964.Google Scholar

The role of differential productivity growth in traded and non-traded goods was described in Balassa, B., « The Purchasing Power Parity Doctrine : A Reappraisal ». J. Polit. Econ. Dec. 1964.CrossRefGoogle Scholar On the occasion of the fiftieth anniversary of IRES it is fitting to note the early contributions of L. H. Dupriez.

(2) See, for example, Hahn, F.H., « The Monetary Approach to the Balance of Payments » Journal of International Economics 7, 1977.CrossRefGoogle Scholar There are in practice both theoretical objections of the type described by Hahn and empirical problems related to the monetary identies.

(3) See Budd, A.P. and Burns, T. « The Relationship between Fiscal and Monetary Policy in the London Business School Model », London Business School Econometric Forecasting Unit Discussion Paper No. 51, June 78.Google Scholar

(4) See, for example, Vaubel, R., Choice in European Monetary Union, Ninth Wincott Memorial Lecture, Institute of Economic Affairs, 1979.Google Scholar

(5) Davidson, J.E.H., Hendry, D.F., Srba, F. and Yeo, S., « Econometric Modelling of the Aggregate Time-Series Relationship between Consumers’ Expenditure and Income in the United Kingdom », Economic Journal 352 December 1978.Google Scholar