International Financial Integration: The Limits of by David T. Llewellyn

By David T. Llewellyn

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There is, therefore, an automatic balance-of-payments adjustment mechanism through the effect upon the money supply. In practice, however, while in the long run a balance-of-payments deficit may be adjusted via the money supply, it is likely that the country will face an external reserves constraint before full adjustment has occurred. For this reason the loss of reserves will likely force more speedy balance-of-payments adjustment policies. Permanent deficits in the monetarist analysis reflect attempts by the central bank to prevent the domestic money supply adjusting to external disequilibria.

G. 80), and at a discount if it is depreciated against the spot rate. The aim of this chapter is to identify the role of forward exchange transactions in international capital movements rather than to present an exhaustive presentation of forward exchange theory per se, or to integrate the forward rate into a full macro model. 1 Nevertheless, to appreciate the role of forward transactions a review of the basic theory of forward exchange rate determination is necessary. In this and the following chapter two alternative analytical frameworks are considered and these may be termed: (i) the structural model, and (ii) the Cambist approach.

Arbitrageurs react by reducing the proportion of their portfolios held in sterling and increasing the proportion in foreign currency assets. In this way speculation conducted entirely in the forward market affects both the magnitude and direction of international capital flows. 1 (p. 40) that the effect upon spot capital movements of shifts in the speculators' schedule is in part determined by the elasticity of the schedule; the more elastic is the schedule the greater the impact on spot capital flows of changes in speculators' views about the future spot rate.

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