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Aspects of International Monetary Influences

Published online by Cambridge University Press:  06 April 2009

Dennis E. Logue  and
Richard James Sweeney
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Extract

This study presents theory and some exploratory empirical work on several separate strands of monetarism in an international context and reports the results of tests of the two interrelated hypotheses: (a) the United States' monetary expansion was responsible forthe exportation of inflation to the rest of the world during the period of generally fixed exchange rates that lasted from the end of World War II until August 1971 (followed by the Smithsonian revaluations and generalized floating in March 1973), and (b) foreign nations could not control their money supplies, even in the short run, to prevent importing inflation. Succinctly stated, the monetarist approach to macroeconomic phenomena holds that money is preeminent in determining the short-run shocks to real output and the long-run price level of an economy. However, received theory is simply not clear as to whose money is most important in an international context. Is it the domestic money stock which is kept relativelyindependent of foreign forces under fixed exchange rates through astute central bank policy, at least in the short run? Is it the rest of the world money stock which, under fixed exchange rates, is a close substitute for domestic money? Or is it the money stock of the so-called world's banker, the United States, which drives foreign economies? We address these issues and others in our empirical analysis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 13 , Issue 1 , March 1978 , pp. 143 - 156
Copyright
Copyright © School of Business Administration, University of Washington 1978

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References

1 These hypotheses bear some resemblance to those examined by Triffen, Robert and Grubel, Herbert, “The Adjustment Mechanism to Differential Rates of Monetary Expansion among Countries of the European Economic Community,” Review of Economics and Statistics (11 1962), pp. 486–491Google Scholar. Using a less robust procedure than the one used here, they found that EEC countries had very little ability to maintain independent financial policies; in a similar vein, Keran, Michael, “Towards an Explanation of Simultaneous Inflation-Recession,” Federal Reserve Bank of San Francisco, Business Review (Spring 1975), pp. 18–30Google Scholar, investigated relationships between nominal income and world money and domestic money. It must be carefully noted that by “world money” Keran really means international reserves. His results indicate that “world money” seems to be a factor, in addition to domestic money supplies, in explaining inflation in many of the six OECD countries he considers. We differ with Keran in terms of theory and differ substantially in our conclusions-principally with respect to the role of the U.S. money supply in determining the nominal output of the other OECD countries. Moreover, though Keran finds a significant relationship between world money and world prices, no significant relationship between world money and nominal output is found for the United States, the one country he reports having tested. In contrast, we find a significant relationship between nominal output and both U.S. and world money supplies. A recent paper by Heller, H. Robert “International Reserves and World-Wide Inflation,” IMF Staff Papers (1976)Google Scholar relates worldwide inflation to the growth of international reserves. Among other major differences between our empirical work and his is our focus on the U.S. money supply as playing a dominant role during the fixed exchange rate period. For detailed critiques of the Keran and Heller papers, see Sweeney, Richard J. and Willett, Thomas D., “Eurocurrencies, Petro-dollars, and World Liquidity and Inflation,” Journal of Monetary Economics, Carnegie-Rochester Conference Series, Vol. V (1977)Google Scholar.

An earlier paper, M. Keran, “Monetary and Fiscal Influences on Economic Activity: The Foreign Experience,” regressed changes in nominal income for each of several OECD countries against changes in that country's money supply for a fixed rate period. This procedure ignores the possible interdependence of national money supplies under fixed rates. Indeed, the evidence presented below suggests that international monetary influences generally cannot be so ignored.

2 See Richard J. Sweeney and Thomas D. Willett, “The International Transmission of Inflation: Mechanisms, Issues, and Evidence,” Special Supplement on Bank Money, Credit and Inflation in Open Economies, Kredit und Kapital (forthcoming) and “The Inflationary Impact of Exchange Rate Adjustments,” in The Effects of Exchange Rate Adjustments, edited by Clark, P. B., Logue, D. E., Sweeney, R. J., U.S. Treasury (1976)Google Scholar.

3 Ibid. (Both references)

4 The most powerful and lucid presentation of the view that the United States did export inflation is Haberler, Gottfried, “International Aspects of U.S. Inflation,” in A New Look at Inflation, edited by Cagan, P. et al. , American Enterprise Institute for Public Policy Research (1973)Google Scholar.

5 This is the “Keynesian” transmission mechanism, discussed in Sweeney and Willett, “International Transmission.”

6 On the U.S.'s role, see Haberler, “International Aspects.” For further discussion of the monetary transmission mechanism see Sweeney and Willett, “International Transmission.” Emphatic views that foreign countries cannot sterilize reserve flows, except by extreme measures and then only in the short run, are in Porter, Michael, “Capital Flows as an Ofsset to Monetary Policy: The German Experience,” IMF Staff Papers (07 1972)Google Scholar and Kouri, Penti and Porter, Michael, “International Capital Flows and Portfolio Equilibrium,” Journal of Political Economy (05/06 1974)Google Scholar. As Sweeney and Willett note, previous unpublished versions of the Kouri and Porter paper, widely circulated and cited, showed that sterilization was not possible for certain countries, whereas the published version maintained these countries could sterilize (in the short run) though with difficulty.

7 This is the “direct price transmission” mechanism in Sweeney and Willett, “International Transmission.”

8 This seems to be an accurate portrayal of Johnson's, H. G. “The Monetary Approach to Balance of Payments Theory,” Journal of Financial and Quantitative Analysis (03 1972)CrossRefGoogle Scholar.

9 See Sweeney and Willett, “Inflationary Impact.” The possibility that such properties hold even in the very short run creates great difficulties for testing the relationship between reserve flows and domestic money stocks-the same data and statistical results can be interpreted as showing great or little domestic control over the money supply. On this point see Sweeney and Willett, “International Transmission,” for a discussion with references to the relevant literature by Johnson, Willms, Porter, Kouri and Porter, and Goldstein.

10 Arthur Burns has argued this in an address to the American Bankers Association, June 13, 1975, reported in The New York Times (June 14, 1975), p. 33. See also Haberler, “International Aspects.” Generalized floating, with various degrees of government intervention, with snake type arrangements, and with many countries pegging to a dominant trading partner (for example, many LDC's to the United States) began in late March 1973. We consider up to the early part of 1971 in statistical work presented here, because the disruptions caused by U.S. closing of the gold window, the two U.S. devaluations, and associated currency realignments might reasonably be argued to require some adjustments in the empirical work, for example, use of dummy variables. However, extending our work to early 1974, using exactly the techniques reported below, produced almost identical qualitative results.

11 As pointed out in Willett, Thomas D., “Eurocurrency Markets and National Monetary Policies,” in Eurocurrencies and The International Monetary System, edited by Logue, D., Makin, J., and Stem, C., American Enterprise Institute for Public Policy Research (1976)Google Scholar, increases in the international mobility of capital will likely increase the size of open market operations necessary to implement a given monetary policy.

12 See Sweeney, and Willett, , “International Transmission,” and Milton Friedman, “Remarks,” Conference on the International Transmission of Inflation, Federal Reserve Bank of Chicago (1974)Google Scholar. Note that this hypothesis can be interpreted as supplementing the two tested here, rather than being a strict competitor; see the relevant references in footnote (1).

13 See, for example, Alexander Swoboda, “Gold, Dollars, Eurodollars, and the World Money Stock,” Mimeo (September 1974).

14 We have grave reservations about the quality of the data thus found, especially the monetary data. However, the easy accessibility of the data, particularly for replicating and extending our results, urged that we not develop our own series.

15 See, for example, Schmidt, J. and Waud, R., “The Almon Lag Technique and the Monetary versus Fiscal Policy Debate,” Journal of the American Statistical Association (03 1973), pp. 11–19Google Scholar, for a critique of the approach.

16 See Goldberger, A., Econometric Theory (New York: J. Wiley & Jons, 1964), pp. 231–35Google Scholar

17 Upon written request, the authors will furnish complete sets of the results.

18 See Goldberger, , Econometric Theory, pp. 175–77Google Scholar.

19 Haberler, “International Aspects.”

20 See Balassa, B., “The Purchasing Power Parity Doctrine: A Reappraisal,” Journal of Political Economy, Vol. 72 (1964)CrossRefGoogle Scholar, McKinnon, R. I., Monetary Theory and Controlled Flexibility in the Foreign Exchange, Princeton Essays in International Finance, No. 84 (1971)Google Scholar, Sweeney, R. J., “The Relationship between the Rates of Consumer and Tradeable Goods Price Inflation and the Rate of Economic Growth,” OASIA/Research Discussion Paper, U.S. Treasury (1976)Google Scholar, for further discussions of the relationship between the inflation rates in the two indices.