Salin, Pascal
A icle
Commen on Nancy Pe eg im Ma ion's "Two-Tie
Exchange Ra es and Mone a y Au onomy in a Po olio-
Balance Model"
Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de
Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: Salin, Pascal (1979) : Commen on Nancy Pe eg im Ma ion's "Two-Tie
Exchange Ra es and Mone a y Au onomy in a Po olio-Balance Model", Zei sch i ü Wi scha s-
und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s- und
Sozialwissenscha en, Ve ein ü Socialpoli ik, ISSN 0342-1783, Duncke & Humblo , Be lin, Vol. 99,
Iss. 1-2, pp. 65-70,
h ps://doi.o g/10.3790/schm.99.1-2.65
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Commen on Nancy Pe eg im Ma ion's
"Two-Tie Exchange Ra es and Mone a y Au onomy
in a Po olio-Balance Model"
By Pascal Salin*
My commen s do no aim a denying he alue o Nancy Ma ion's
pape and he no el y o he a gumen s. I ce ainly p aise he ex as a
e y s imula ing one. Howe e i sugges ed me he ollowing ema ks:
1. A dual sys em (de ined as in Model I whe e in e es paymen s a e
epa ia ed on he comme cial ma ke ) is equi alen o a sys em whe e
e u ns on bonds a e subsidized o axed so ha he in e es a es can
di e a home and ab oad ( 4=
T')
e en i he e is pe ec subs i u abili y
be ween asse s.
Howe e , i seems ha his conclusion is based on he ac ha he e
is no capi al accumula ion in he model, and he eal a e o e u n on
capi al is no conside ed. In he long un, howe e , he eal a es o
e u n on capi al and asse s mus be equalized in a coun y. Two cases
may be conside ed in his espec :
— I he p oduc ion unc ions a e he same a home and ab oad,
equaliza ion o ac o p ices is b ough abou by commodi y ade.
The e o e, he a e o e u n on capi al mus be he same all o e he
wo ld; as he eal a e o e u n on asse s canno be di e en , in he
long un, om he a e o e u n on eal capi al, he equaliza ion o all
hese a es o e u n implies ha he inancial exchange a e, e, mus
change un il i is equal o he ixed comme cial a e, e. A ha poin
= '.
— I p oduc ion unc ions a e di e en and he a es o e u n on
capi al a e di e en a home and ab oad, he e is an adjus men p ocess
unde an uni a y exchange a e sys em ia he p ocess o capi al ac-
cumula ion: he ade de ici o he coun y wi h he highe a e o
e u n on capi al (which is a ade su plus o he o he coun y) makes
a ans e o sa ing possible un il eal a es o e u n a e equalized. In
a dual exchange a e sys em he e is no communica ion be ween he
o eign sec o o he commodi y ma ke and he bond ma ke : a coun y
canno expo (impo ) eal capi al ia a ade su plus (de ici ) and a
co esponding de ici (su plus) in he inancial and mone a y sec o s.
* Uni e si é-Pa ix-IX-Dauphine
5 Zei sch i i i Wi scha s- und Sozialwissenscha en 1979/1/2
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66 Pascal Salin
In ac , he Cen al Bank can main ain he ixi y o he comme cial ex-
change a e in he long un only i he e is no con inuing ade su plus
o de ici . The e o e, a dual exchange a e sys em p e en s long- un
ans e s o eal capi al. Since people canno accumula e o eign bonds
(a leas i he na ional cu ency is no adable) he e canno be an
op imal alloca ion o capi al in he wo ld.
In o he wo ds, he equilib ium exchange a e mus be de ined as he
one which co esponds o he pu chasing-powe pa i y, and an equilib-
ium exchange a e can exis wi hou a ze o ade balance when he e
is a long- un ans e o capi al: he desi ed ade su plus (de ici )
inances (is inanced by) a capi al de ici (su plus). A dual sys em is
based on he assump ion ha he equilib ium exchange a e is de ined
as he one which secu es a ade balance equal o he in e es income
epa ia ed ia he comme cial ma ke .1 Thus, he e is no possibili y o
ans e ing capi al.
Assume o ins ance ha , s a ing om an ini ial in e na ional equi-
lib ium, he e is some so o echnical p og ess in he es o he wo ld
such ha he eal a e o e u n on capi al becomes highe in he es
o he wo ld han in he coun y conce ned. Unde a ixed a e sys em
( he same esul would hold unde a lexible a e sys em) people would
buy o eign asse s and sell commodi ies, which would no a ec he
cen al bank ese es. The p ocess would con inue un il he eal a es
o e u n we e equalized all o e he wo ld.
Wha would happen wi h a dual sys em? Le us ake he case whe e
he in e es is epa ia ed on he comme cial ma ke .2 Na ionals will
buy o eign bonds un il he di e en ial be ween he inancial a e and
he comme cial a e makes he eal a e o e u n equal o na ional
and o eign bonds. To buy hese o eign bonds hey will y o sell mo e
commodi ies; howe e , he p oceeds in o eign exchange go om hese
expo s canno be used di ec ly o buy o eign bonds: he cen al bank
gi es na ional money agains o eign cu ency. Ha ing oo much money,
he na ionals wan o sell i agains o eign bonds. As he na ional cu -
ency is no in e na ionally aded in Nancy Ma ion's model, only
na ionals can exchange na ional cu ency o o eign bonds. The ma ke
o o eign bonds in he coun y is a closed ma ke be ween na ionals.
Con a y o he case o an uni a y sys em, he e has no been an ex-
change o commodi ies agains o eign bonds. The addi ional expo s o
commodi ies do no s op only when he eal a es o e u n on capi al
a e equalized in he coun y and ab oad — as would happen unde an
uni a y exchange sys em — bu as soon as he gap be ween he inancial
1 O a ze o ade balance (when epa ia ion o in e es income is made
ia he inancial ma ke ).
2 The esul would be he same wi h Model II.
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Commen on Nancy Pe eg im Ma ion 67
and he comme cial exchange a es a e such ha he eal a es o e u n
on bonds (and no on capi al) a e equalized.
Howe e i mus be clea ha he eal a e o e u n on o eign
bonds o a na ional does no co espond o i s wo ld eal a e o e u n
and does no co espond o an in e na ional op imal alloca ion o capi al,
exac ly in he same way as a a i in oduces dis o sions be ween
na ional and o eign p ices.
Mo eo e , he addi ional expo s o commodi ies ini ia e a new c ea-
ion o na ional cu ency, al hough i is no desi ed since we assumed
an ini ial in e na ional equilib ium and he me e echnical p og ess is
in no way a possible cause o wo ld p ice inc ease. The e o e, he
coun y is hence o h in a disequilib ium posi ion. To summa ize, he
conclusions a ise om he ac ha a dual sys em canno make he
dis inc ion possible be ween a (desi ed) ade balance due o long- un
eal ans e s and a (disequilib ium) ade balance due o incompa ible
mone a y policies o a ious coun ies.
2. As we jus saw he e is a ixed supply o o eign bonds in he
sho - un8 since o eigne s canno sell o buy any hing agains bonds.
The bond ma ke is a ma ke o na ionals only. The quan i y o bonds
on his ma ke depends solely on he ini ial quan i y o bonds held by
na ionals when he dual sys em depends on he p obabili y ha he
sys em will disappea ...
In he case whe e inancial e u ns on asse s a e epa ia ed ia he
inancial ma ke , which means ha hey canno be aded agains com-
modi ies, any inancial exchange a e can be an equilib ium exchange
a e. In ac , i does no ma e i you mul iply he exchange a e by
10, 100 o one billion since bo h he nominal alue o he bond and he
nominal alue o e u ns a e mul iplied by he same numbe . In a
sys em whe e he e u ns a e epa ia ed on he comme cial ma ke ,
he le el o he inancial exchange a e makes a di e ence, since he
nominal alue o he e u ns de e mine hei pu chasing-powe .
A his poin he i a ionali y o a dual sys em wi h epa ia ion on
he inancial ma ke mus be s essed. Any asse jus ep esen s a u u e
3 Thus, Nancy Ma ion's asse ion acco ding o which he supply o o eign
bonds is pe ec ly elas ic is w ong. Equa ion (7) ough o be w i en as
eF
—
eFh = 0 ins ead o eF
—
eFh = 0 (F being he ixed supply o o eign
bonds). This o mula ion explains why e changes i he excess demand o F
changes. This is ue in he sho - un. In he longe - un, F would inc ease
since he holde s o o eign bonds canno use he in e es ecei ed o buy
commodi ies and hey can only accumula e o eign bonds. The a e o g ow h
o hei s ock o o eign bonds is hus exogenously gi en, since hey ha e
no o he way o accumula ing hem (by selling commodi ies, o by selling
domes ic bonds o domes ic cu ency since bo h a e assumed o be in e -
na ionally immobile).
5*
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68 Pascal Salin
pu chasing-powe in he o m o in e es s o eimbu semen o he
p incipal. I you canno ade he e u ns no he p incipal in o com-
modi ies (di ec ly o indi ec ly ia a ce ain cu ency), he e is no
jus i ica ion o holding asse s, which become pu e abs ac goods
wi hou any u ili y so ha no p ice can be de e mined o hem.
When Nancy Ma ion w i es ha he a e o e u n on bonds in Model
II is u = = ', she can w i e i only in a e y o mal sense, since his
" eal" a e o e u n has no pu chasing powe o , a leas , a e y im-
p obable one. One could ew i e he equa ion o u as ollows:
e«
'
u = e
whe e ee means "expec ed inancial exchange a e". As any inancial
exchange a e can be an "equilib ium" exchange a e, na ional specu-
la o s may expec any ee, so ha he e is no eason o deciding ha
u = '.4
I all specula o s a e ce ain ha he dual ma ke will las o e e
he u ili y o o eign asse s is ze o o hem (excep in he case whe e
hey expec o emig a e). No one will demand o eign asse s and ce will
become equal o ze o (ac ual e will also end owa ds ze o). The ex-
pec ed a e o e u n on o eign bonds will no be ze o i i is expec ed
ha he coun y will go back o an uni a y exchange a e sys em ( ixed
o lexible) o i he e is any oppo uni y o smuggling, he la e being
p obably a unc ion o he gap be ween he inancial and he com-
me cial a es.
Thus, he demand o o eign bonds and, he e o e, he equilib ium
inancial a e depend on he p obabili y ha he sys em will be aban-
doned in he u u e and on he possibili y o smuggling, which means
ha a dual sys em wi h epa ia ion on he inancial ma ke is a a he
odd sys em.
I also ollows ha he assump ion o pe ec subs i u abili y is no
co ec o Model II since people canno be indi e en o he choice
be ween o eign and domes ic bonds, and he equali y be ween and
can exis only in he e y o mal sense s essed abo e.
Fo he same easons, in Model II, Wh ough o be de ined as Lh + Bh
and no as Lh + Bh + Fh since Fh only gi es a po en ial sou ce o weal h
(in he case whe e he sys em would be supp essed).5 Al e na i ely, one
could w i e Wh = Lh + Bh + Fhe, whe e Fhe would ep esen he ex-
4 In ac , Nancy Ma ion does w i e ( oo no e 26) ha "i is assumed ha
he expec ed dep ecia ion o he inancial a e is he same o all weal h
holde s and has a p obabili y dis ibu ion a ound mean ze o".
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Commen on Nancy Pe eg im Ma ion 69
pec ed alue o o eign bonds and would be a unc ion o he p obabili y
o a supp ession o he dual sys em and o he cos and isk o smug-
gling.
4. The impo an conclusion o Nancy Ma ion is ha , in Model I,
mone a y au ho i ies can e ain some in e es a e au onomy. We saw
ha his conclusion was deba able in he long- un (§ 1). Howe e , e en
in he sho - un he e migh be mo e cons ain on he au onomy o
mone a y au ho i ies han i appea s in Nancy Ma ion's pape . She
de ines mone a y au onomy as meaning ha " he au ho i ies can egu-
la e ne capi al lows independen ly o he ela i e a es o e u n a
home and ab oad and hus ha e some con ol o e he domes ic in e es
a e". The links be ween capi al mo emen s and he na ional
economy a e no only hose which a e channelled ia he mone a y base
in a sys em o pegged exchange a es, bu , mo eo e , hose which a e
implied by asse changes in indi iduals' po olios.
Howe e , he de ini ion o mone a y au onomy may be oo na ow:
mone a y policy is au onomous when a coun y can a o d a long- un
a e o in la ion o ally di e en om ha o o he coun ies. The
pegging o exchange a es o comme cial ansac ions ob iously does
no allow such a esul since na ional p ices canno di e widely om
wo ld p ices. The e o e, mone a y au onomy, in such a sys em, can be
gi en only one meaning: o say ha a dual sys em can isola e a coun y
be e han a ixed a e sys em could come down o saying ha capi al
mo emen s, and no he ade balance, a e esponsible o sho - un
impo ed ins abili y in a sys em o ixed a es. Thus, he long- un a e
o in la ion being gi en by he wo ld a e o in la ion, he dual sys em
would pe mi a mo e s abilizing sho - e m policy (as we saw p e-
iously, in he long- un he eal a e o in e es is he same a home and
in he es o he wo ld, so ha nominal in e es a es canno be di -
e en in he long- un, since he a es o in la ion a e he same; he e-
o e, mone a y au onomy in managing he in e es a e can only be
conce ned wi h sho - e m luc ua ions in he nominal in e es a e).
The e o e, he plea in a o o dual exchange sys em es s on he
assump ion ha capi al mo emen s a e des abilizing, con a y o he
long-las ing academic adi ion, bu in con o mi y wi h he o icial
poin o iew.
To illus a e he opinion acco ding o which he "neu alizing" ole
o he dual ma ke is deba able, jus assume ha he a e o money
c ea ion in he coun y is oo low gi en he "wo ld a e o in la ion".
5 In a p i a e co espondence Nancy Ma ion sugges ed ha "pe haps in
a less simplis ic model — o example, a model whe e o eigne s held some
o he domes ic bonds — i would be qui e app op ia e o include Fh as pa
o domes ic weal h. In such a speci ica ion, po olio swi ches could occu
be ween domes ic and o eign bonds in a wo- ie sys em".
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70 Pascal Salin
In a ixed a e sys em, he na ionals would ge money by selling com-
modi ies and bonds o he o eign sec o , he cen al bank buying he
p oceeds in o eign money o hese sales and selling na ional money.
Thus, he e would be a empo a y su plus in bo h he ade balance
and he capi al balance, as long as he a e o na ional money c ea ion
does no keep up wi h he wo ld a e o in la ion. In be ween, he e
migh be a (cos ly) dis o sion be ween he p ices o adables and he
p ices o non- adables, he o me ising mo e apidly han he la e .
Wha would happen in a dual sys em? The na ionals canno ge mo e
money by selling mo e asse s o he o eign sec o since he cen al
bank does no in e ene on he inancial ma ke . The e o e, he whole
bu den o adjus men alls on he commodi y ma ke and he ade
balance. The adjus men p ocess is hus slowe han in a ixed a e
sys em o , a leas , no op imal since people a e obliged o ge he
desi ed addi ional quan i y o money only by selling commodi ies
al hough hey migh p e e o sell bo h commodi ies and bonds (i. e. o
dis ibu e di e en ly o e ime he eal ans e implied by he pu -
chase o money). These esul s hold whe he he in e es incomes a e
epa ia ed h ough he comme cial o he inancial ma ke .
Ano he example o he "des abilizing" ole o he dual ma ke would
be gi en by he case men ioned abo e, whe e he eal in e na ional
equilib ium implies a ans e o capi al, hence a non-ze o ade bal-
ance, so ha a "disequilib ium" in he ade balance6 could no be
inanced by (o could no inance) he capi al accoun , which would
esul in an undesi able and disequilib a ing des uc ion (c ea ion) o
domes ic base money.
5. Finally, Nancy Ma ion w i es ha "one a gue ha neglec ing he
goods ma ke in his exe cise is no a se ious omission since he model
is cons uc ed so ha he inancial ma ke s a e una ec ed on impac
by dis u bances in he goods ma ke " ( oo no e 1). The neglec o he
commodi y ma ke co esponds o he ac ha income is no an
a gumen in he a ious demand unc ions o asse s, since hese unc-
ions ( o bonds, money and o eign bonds) depend only on he o eign
and na ional a es o in e es , he exchange a es and he o al weal h.
The model is a pu ely inancial model and he asse ma ke s a e com-
ple ely sepa a ed om he commodi y ma ke . In ac , changes in o
he exchange a es may a ec abso p ion, hus he ade balance, since
he eal alue o weal h is a ec ed and people may wish o change hei
a e o sa ing.
6 A "disequilib ium" ade balance he e means a non-ze o ade balance
in Model II (whe e in e es income is epa ia ed on he inancial ma ke )
o a si ua ion whe e he ade balance is no equal o he amoun o in e es
income epa ia ed in Model I.
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