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The Monetary Approach to the Balance of Payments (Collected Works of Harry Johnson) by Harry G. Johnson, Jacob A. Frenkel

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14

International Reserve Flows and Money Market Equilibrium

The Japanese Case1

DONNA L. BEAN

INTRODUCTION

The monetary approach to the balance of payments attributes a significant role in the international adjustment process to monetary variables.2 The model predicts that reserve accumulation is positively related to the rate of growth of domestic income and negatively correlated with the rate of domestic credit expansion. Some of the policy implications which follow from these results contradict the standard Keynesian analysis. The monetary approach implies that the central authorities can exercise some degree of control over the level of international reserves by manipulating the composition of the money supply base through adroit credit creation ...

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