THE MONETARY APPROACH TO THE BALANCE OF PAYMENTS
Topic 17.2
The MABP emphasizes the monetary aspects of the balance of payments.
The MABP is based on the idea that any balance of payments disequilibrium is based on monetary disequilibrium.
Monetary disequilibrium is an imbalance between the amount of money people wish to hold and the amount supplied by the monetary authorities.
So the determinants of money demand and money supply also determine the balance of payments.
David Hume understood the concept of the MABP.
The MABP is based on fixed exchange rates. If there is a disequilibrium money must move because the exchange rate cannot adjust. In economics, if prices are not allowed to adjust, then quantities must carry all the burden of adjusting to exogeneous shocks.
