Financial Markets, Money and the Real World
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Financial Markets, Money and the Real World

Paul Davidson

Paul Davidson investigates why the 1990s was a decade of financial crises that almost precipitated a global market crash. He explores the reasons why the global economy still struggles with the aftermath of these crises and discusses the possibility that volatile financial markets in the future will have real impacts on whole industries and national economic systems.
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Chapter 8: Complicating the Picture: Money and International Liquidity

Paul Davidson


In the previous chapters, a closed economy was discussed where all transactors resided in the same nation and all contractual commitments were expressed in terms of a single monetary unit. In the following chapters, the analysis is expanded to deal with international contractual transactions. The use of different monies by parties to international contracts has important implications for the demand for liquidity in a global economy. 8.1 OPEN VERSUS CLOSED AND UNIONIZED VERSUS NON-UNIONIZED MONETARY SYSTEMS A precise taxonomy is a necessary precondition for all scientific inquiry. Distinctions are made between open and closed economies and between unionized monetary systems (UMS) and non-unionized monetary systems (NUMS). Table 8.1 presents the four possible combinations of these features. Table 8.1 A classification of economic systems by trading patterns and monetary systems Economy monetary system Unionized monetary system (UMS) (⌰ϭ0) Non-unionized monetary system (NUMS) (⌰Ͼ0 ) Closed economy (␸ϭ0) 1. 2. 2. 2. 1. 2. 2. 2. 3. no external trading partners single money for all contracts no external trading partners various monies for contracts no fixed exchange rate Open economy (␸Ͼ0 ) 1. external trading partners 2. single money for all 2. contracts 1. external trading partners 2. various monies for 2. contracts 3. no fixed exchange rate 136 Money and international liquidity 137 The first cell of Table 8.1 involves a closed economy utilizing a single money to settle all contractual obligations between residents. This cell is the equivalent of the traditional closed economy model used by Keynes in The...

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