In Chapter 2 the simple IS/LM paradigm was extended to incorporate the monetary effects of the balance of payments. While this paradigm, despite its many and well-known limitations, was found to be a useful general analytical framework, it is particularly weak in its representation of the theory of international capital movements. In particular, the notion of a stable F schedule implicitly assumes that: (i) capital flows in response to interest-rate levels; (ii) capital movements take place on an uncovered basis;1 and (iii) domestic interest rates move independently of foreign interest rates so that a rise in the domestic rate induces a corresponding widening of the interest-rate differential against foreign assets. In this chapter we find that each of these assumptions is unwarranted both theoretically and empirically.
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© 1980 David T. Llewellyn
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Llewellyn, D.T. (1980). International Capital Movements: Theory and Evidence. In: International Financial Integration. Problems in Economic Integration. Palgrave, London. https://doi.org/10.1007/978-1-349-16474-5_6
Publisher Name: Palgrave, London
Print ISBN: 978-0-333-21103-8
Online ISBN: 978-1-349-16474-5
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