Dennis H. Robertson And The Monetary Approach To Exchange Rates
Prominent among competing explanations of exchange rate determination in a regime of floating exchange rates is the so-called monetary approach, which holds that the exchange rate between two national currencies is determined by current and prospective relative supplies of and demands for those national money stocks. This theory has a long tradition going back more than 300 years. As an integral part of pre-Keynesian international monetary theory, it formed the central analytical core of classical and neoclassical explanations of exchange rate behaviour. Although it was temporarily eclipsed by the rival elasticities and foreign trade multiplier or income-expenditure approaches that gained popularity with the domination of the Keynesian revolution, it has recently made a comeback and today is widely employed by academic and business economists to explain the behaviour of exchange rates in the post-Bretton Woods era of generalized floating. For example, such well-known economists as Robert Barro, John Bilson, Jacob Frenkel, and Michael Mussa1 have successfully employed the monetary approach to account for recent exchange rate experience, as have analysts at Citibank, Chase Manhattan, and other financial instituttions. Finally, it is worth noting that certain segments of the financial press, notably the editorial pages of the Wall Street Journal, regularly espouse the monetary approach.
Unable to display preview. Download preview PDF.
- 1b.J. Frenkel and K. Clements, ‘Exchange Rates in the 1990’s: A Monetary Approach’, Working Paper 290, NBER Working Paper Series (Cambridge: National Bureau of Economic Research, October 1978);Google Scholar
- 1d.M. Mussa, ‘Empirical Regularities in the Behavior of Exchange Rates and Theories of the Foreign Exchange Market’, vol. 11 of the Carnegie-Rochester Conference Series on Public Policy, a supplementary series tp the Journal of Monetary Economics, 1979, pp. 9–57;Google Scholar
- 1e.M. Mussa, ‘Macroeconomic Interdependence and the Exchange Rate’, in R. Dornbusch and J. Frenkel (eds) in International Economic Policy: Theory and Evidence (Baltimore: Johns Hopkins University Press, 1979).Google Scholar
- 2a.M. Kreinin and L. Aofficer, The Monetary Approach to the Balance of Payments: A Survey, Princeton Studies in International Finance, 43 (Princeton, NJ: Princeton University, International Finance Section, 1978) see especially pp. 28–31.Google Scholar
- 3.D. H. Robertson, Money (New York: Harcourt Brace & Co, 1922). Unless otherwise noted, all references are to the 1963 reprint of the 1947 edition, which is virtually the same as the 1929 edition as far as the discussion of floating exchange rates is concerned.Google Scholar
- 5.M. Grice-Hutchinson, The School of Salamanca: Readings in Spanish Monetary Theory, 1544–1605 (Oxford: Clarendon Press, 1952).Google Scholar
- 7.Ibid., pp. 177–8; E Eshag, From Marshall to Keynes: An Essay on The Monetary Theory of the Cambridge School (Oxford: Basil Blackwell, 1963) pp. 26–34.Google Scholar
- 8.H. Ellis, German Monetary Theory, 1905–1933 (Cambridge, Mass.: Harvard University Press, 1934) pp. 209–36.Google Scholar
- 9.D. H. Robertson, Money, 4th ed. (Chicago: University of Chicago Press, 1963) p. 58.Google Scholar
- 36.L. von Mises, ‘ Balance of Payments and Foreign Exchange Rates’ (1919) and ‘Stabilization of the Monetary Unit from the Viewpoint of Theory’ (1923),Google Scholar
- 36a.both in L. von Mises, On the Manipulation of Money and Credit (trans. Bettina Bien Greaves, ed. Percy L. Greaves, Jr) (Dobbs Ferry, NY: Free Market Books, 1978) p. 51.Google Scholar