National Monetary and Financial Analysis PDF
Preview National Monetary and Financial Analysis
NATIONAL MONETARY AND FINANCIAL ANALYSIS NATIONAL MONETARY AND FINANCIAL ANALYSIS Graeme S. Dorrance © Graeme S. Dorrance 1978 Softcover reprint of the hardcover 1st edition 1978 978-0-333-23238-5 All rights reserved No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First edition 1978 Reprinted 1980 Published by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world British Library Cataloguing in Publication Data Dorrance, Graeme S. National monetary and financial analysis 1. Finance I. Title 332 HG154 ISBN 978-1-349-15860-7 ISBN 978-1-349-15858-4 (eBook) DOI 10.1007/978-1-349-15858-4 TO HELEN Contents Preface ix Introduction Some of the Problems 1 PART ONE THE BASIC RELATIONS 7 The Nature of Payments and Institutions 9 2 The Dissimilarity of Economic Units 17 3 The Adjustment Process 31 PART TWO THE TRANSACTORS IN AN ECONOMY 43 4 The Constrained Sectors: I: Households- 45 Basic Preferences 5 The Constrained Sectors: I: Households- 64 Portfolio Reaction to Interest and Price Changes 6 The Constrained Sectors: II: Non-financial Companies 78 7 The Constrained Sectors: III: Financial Institutions- 92 Financial Flows 8 The Constrained Sectors: III: Financial Institutions- 112 Financial Stocks 9 The Hybrid Sectors: Government Non-financial 129 Enterprises and Local Authorities 10 The Independent Sectors: I: The National Government 131 11 The Independent Sectors: II: The Central Bank 137 12 The Residual Sector: The Balance of Payments 140 viii Contents PART THREE THE FINANCIAL TRANSACTIONS IN AN ECONOMY 145 13 The Financial Aggregates 147 Index of Names 187 Index of Subjects 189 Preface The first draft of this study was completed while I was on a year's sabbatical leave from the International Monetary Fund. Most of that year was spent at the Johns Hopkins University and at the Australian National University, with shorter periods at the London School of Economics and Political Science and at Monash University. To all of these institutions I am most grateful. This study started as one on financial statistics. However, as it developed the discussion of the analytic foundations came to overwhelm the statistics. The result is, I am afraid, that there is a good deal in this book which represents the process of getting rid of the ideas which I used to have and of finding my way to those which I now have. There are many skins which I have sloughed still littering these pages. Attribution is a problem in any study. It is a problem primarily because one cannot be sure that an idea that one thinks may be original does not derive from some half-forgotten reading anywhere from a fortnight to several decades ago. In general, I have tried (but not always succeeded) to follow the Gurley-Shaw precedent that, as this study is directed to professional economists, it is taken for granted that they will recognise, without benefit of reference, my dependence on intellectual forbears. Only when I have drawn on unpublished material, or when an important part of the analysis was suggested to me in private or in seminar discussions, have I attempted to be certain to include footnote acknowledgements. Otherwise, I have attempted to limit footnotes, other than references to direct quotations, to data or explanatory references, to relatively obscure sources that I consider interest ing or to authors with whom I disagree. Parts of this study have been presented at seminars at the Atlantic Economic Society, The Australian National University, the University of Birmingham, the Johns Hopkins University, the London School of Econ omics, Melbourne University, Monash University, the Reserve Bank of Australia, and the University College of North Wales. The discussions initiated by these presentations and many discussions with friends who have read earlier drafts of parts of it have done much to reduce the number of errors of analysis, and to suggest lines along which incompletely deVeloped thoughts might be extended. To list the many individuals who have contributed to the development of my thoughts would run the certain risk that someone who had been most helpful would be omitted inadvertently. However, some acknowl edgements are essential. Purisima Anderson, Erica Harriss and Komola Ghose; as well as Judy Latta, Betty Newman, Nancy Sever, and Gayelle x Preface Whyatt have all accepted for retyping each of the many revisions to earlier drafts with smiles. Finally, my wife, who should be included among the anonymous critics referred to earlier, also has cheerfully put up with my foul moods on the many occasions when drafting was moving slowly. The description of asset adjustment included in Chapter 2 has previously been published in The Philippine Review of Business and Economics (June 1974). The diagrammatic exposition in Chapter 6 was first published in Revista Brasiliera de Mercado de Capitais Vol. I, No. 0 (September/December 1974), pp. 7-26. The analysis of the term structure of interest rates in Chapter 6 is abstracted from an article in Staff Papers, X (July 1963), pp. 275-298. Chapter 12 is a condensation (with revisions) of an article in the Journal oft he Royal Statistical Society (Series A) CXXVI (1963), pp. 446-465. I acknow ledge the willingness of the editors of these journals to permit the re publication of these materials. GRAEME S. DORRANCE The London School of Economics and Political Science The University of Maryland September 1977 Introduction: Some of the Problems At the end of Hitler's War, 'Keynesian' economics was at its apogee. Inflation in the developed countries was regarded as a problem that would disappear once the postwar adjustments could be made. Demand management based on fiscal policy could ensure full employment and prevent the resurgence of a 'Great Depression'. There was to be no important role for interest rate or other financial policies beyond ensuring 'the euthanasia of the rentier'. The financial crises in many European countries in the period 1947-50 and the emergence of strains in the previously reserve-rich 'Third World', followed by the 'Korean' boom, forced national authorities to recognise that finance could not be left to itself, nor could financial policy be limited to an accommodation to the requirements of demand management policies. Since 1951 at least, national authorities have recognised the need to include financial policies as part of their armoury of economic management. Since then, central banks (or other monetary authorities) and Treasuries (or other government agencies) in practically all countries have exercised influence on the debtor/creditor relations in their societies. Specifically, they have influenced the current money values (and, at a remove, the constant price values) of stocks of assets owned and of liabilities owed by individual domestic units, and they have influenced the values of the stocks of claims on and liabilities to non-residents. In this process, they have influenced the relative prices of these claims (that is, the prices of physical capital, interest rates, and the exchange rate) and the rates of change in these variables. For most developed countries, in most years, the postwar employment experience can be termed excellent, particularly if comparisons are limited to those between the interwar and postwar periods. On the other hand, the experience with financial policy can not be regarded as acceptable. To take only one example, in all the developed countries, inflation (largely a monetary phenomenon) has, on the average, persisted at levels that would have been regarded as undermining the fabric of society in the years between Napoleon's defeat and Hitler's invasion of Poland. In many of the developing countries, the record has been scandalous. It has not been possible to maintain reasonable levels of output and relative price stability simultaneously; for some periods even, high unemployment has accompanied rapid inflation. Policy-makers have been unable to control financial variables satisfactorily because economists have not been able to provide guidelines for financial policy comparable to the Keynesian guidelines for demand management policy.
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