A Synthesis of the Keynesian and Monetarist Approaches to the Short-run Theory of the Balance of Payments

A Synthesis of the Keynesian and Monetarist Approaches to the Short-run Theory of the Balance of Payments

The paper generates the approaches as special cases of a general model, finding out the assumptions necessary to produce their propositions. The monetarist propositions essentially follow from perfect capital mobility, whereas those of the Keynesian elasticity-absorption approach are a consequence of the Keynesian neutral monetary policy assumption. This and the fixed-income version of the monetarist approach turn out to be independent special cases of the general model, each approach abstracting from what the other is analyzing. However, the orthodox neutral monetary policy version of the Keynesian approach nests the basic monetarist model. Several results, such as the additional assumptions required for the monetarist effects and the inappropriateness of describing this approach as a long-run theory are also derived.