Abstract:The monetary theory of the balance of payments (MTBOP) has two obvious virtues. It is simple and it is based on assumptions that economists of nearly every persuasion would accept, namely that there exists a stable demand function for real money balances and that purchasing power parity holds in the long run. One question regarding the theory remains unanswered, how well does it explain actual balance of payments and exchange rate behavior over the short and long run? If, as theorists such as Dornbusch (1976) … Show more
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