Chapter 8: Complicating the Picture: Money and International Liquidity
8. Complicating the picture: money and international liquidity 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...
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