Comment on Nancy Peregrim Marion's "Two-Tier Exchange Rates and Monetary Autonomy in a Portfolio-Balance Model"

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 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/291424 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ 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 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.65 | Gene a ed on 2023-04-04 11:56:46 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. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.65 | Gene a ed on 2023-04-04 11:56:46 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* OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.65 | Gene a ed on 2023-04-04 11:56:46 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". OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.65 | Gene a ed on 2023-04-04 11:56:46 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". OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.65 | Gene a ed on 2023-04-04 11:56:46 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. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.65 | Gene a ed on 2023-04-04 11:56:46