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Purchasing power parity theory and the monetary approach to the balance of payments

Summary

In this article the monetary approach to the balance of payments is discussed as a theory and as a guide to balance of payments policy. It is argued that the monetary approach to the balance of payments is strongly connected with the assumption of complete arbitrage in commodities and financial assets. Recent research leads to the conclusion that no such complete arbitrage generally exist. Therefore, the monetary approach gives only an incomplete theory of the balance of payments. The other existing theories have to be used also, especially as guides to balance of payments policies.

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Additional information

He is grateful to Dr. W.J.B. Smits and P.H. Hilbers for their helpful comments.

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de Roos, F. Purchasing power parity theory and the monetary approach to the balance of payments. De Economist 129, 41–57 (1981). https://doi.org/10.1007/BF01705867

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Keywords

  • International Economic
  • Public Finance
  • Power Parity
  • Purchasing Power Parity
  • Financial Asset