Chapter 9: Trade Imbalances and International Payments
A Keynes-Post Keynesian monetary view of transactions between nations, whether the nations are in an unionized monetary system (UMS) or a nonunionized monetary system (NUMS), suggests that any persistent payments imbalance creates a liquidity problem for both nations. The liquidity problem for the (deﬁcit) nation that cannot pay for all its imports with its current export earnings (plus net investment income and net unilateral transfer payments) is how the nation is to ﬁnance the excess of payment obligations over its international receipts. Initially exporters in the export surplus nation provide net short-term trade credit (ﬁnance) to the importers. This temporary short-term trade credit gives the deﬁcit nation time to obtain longer-term funding of any persistent international payment liabilities. For the export surplus nation the less pressing liquidity issue involves choosing which international liquid time machines it should use to store its surplus international earnings (international resource claims). Classical economic theory argues that any observed international payments imbalance is only temporary and cannot persist. Some classical real adjustment mechanism will automatically eliminate the payments imbalance. Both surplus and deﬁcit nations have equal roles to play in this hypothetical classical adjustment mechanism. Classical theorists believe that any liquidity problem, if it exists at all, is transitory and will not aﬀect the global real income in the long run. In discussing classical adjustment mechanisms, Harry Johnson claimed that any liquidity problem, as suggested by Keynes’s monetary theory, is irrelevant. ‘In fact the diﬃculty of monetary theory can be...
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