Money Versus Credit in the Determination of Output for Small Open Economies

Download or read book Money Versus Credit in the Determination of Output for Small Open Economies written by International Monetary Fund and published by International Monetary Fund. This book was released on 1989-09-27 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is well known that in a small open economy where there is perfect substitutability between domestic and foreign assets and costless portfolio adjustment, the monetary authorities cannot control the money supply, but can influence the balance of payments through the use of domestic credit. It has been argued that domestic credit is therefore the relevant variable in output determination as well. However, this paper demonstrates, using a “new classical” structural model, that under the conditions that render the money supply uncontrollable, neither money nor domestic credit affects output. If either has a significant effect in empirical tests, it implies that the assumption of perfect capital mobility is not satisfied.