@twittarmatthaus @BCLMacro Since you expressed an interest in the IMF’s monetary approach to the balance of payments (MABP) with reference to the Chicago tradition, here's a download of information for those interested.
From memory, what are the differences between the IMF and Chicago approach? In short, there are two.
First as Polak describes it, Chicago takes output as exogenous and projects “money demand,” whatever that is, as a function of nominal GDP. Polak’s approach is more fluid, horses for courses. Real GDP or prices or both are endogenous to total spending depending on the situation.
This Polak considers himself more Keynesian. Second, and crucially...
...the IMF’s approach builds the monetary accounts by iterating with the balance of payments proper. Of course, the “balance of payments” in the old-school sense of change in central bank reserve assets by definition links the monetary accounts to the rest of the world.
But the BOP in the broader sense of the full accounting for non-resident current and financial flows against rest of the world is what matters for Polak. Chicago, on Polak’s interpretation, not dissimilar to the Krugman (1979) model, focuses exclusively on the CB balance sheet.
What is crucial is the recognition that ours is an essentially monetary economy—in the sense that Keynes spoke of a Monetary Production Economy where production cannot be thought of as disconnected from financial structure...
...in the open economy it is impossible to understand the BOP without reference to the means of exchange across borders. This means construct and analysis of the central banks’ balance sheet as window to the world. Here’s Stanley Fischer:
"One essential element [in the IMF’s approach] is the link between the balance of payments and the central bank’s balance sheet, which lies at the heart of the monetary approach to the balance of payments."
Or, here’s Mussa in 1974:
"… the fundamental proposition that the balance of payments is an essentially (but not exclusively) monetary phenomenon. In this proposition, the term “the balance of payments” refers specifically to the official settlements balance, that is, ...
"… the fundamental proposition that the balance of payments is an essentially (but not exclusively) monetary phenomenon. In this proposition, the term “the balance of payments” refers specifically to the official settlements balance, that is, ...
...to the “money account” [think central bank reserves] … Thus, analysis of the balance of payments only makes sense in an explicitly monetary model, and, in this sense, the balance of payments is an essentially monetary phenomenon."
Curiously, in the working paper version of this paper, Mussa was more aggressive, adding:
"Or, to give the point a more provocative tone, analysis of the balance of payments in a theoretical framework where money is not explicitly present is, prima face, nonsense."
"Or, to give the point a more provocative tone, analysis of the balance of payments in a theoretical framework where money is not explicitly present is, prima face, nonsense."
Which is funny when you think of it. Anyway, this is one way of understanding tradition against which, during the early 2000s, the IMF moved in no longer monitoring and analysing central bank balance sheets and monetary-financial structure in conduct of surveillance.
Considered nonsense to those of the preceding generation, suddenly it was standard practice. This was true of the euroarea in particular, where the “single currency” apparently removed to need for BOP clearing through central banks. But this was also more general—hence Argentina.
Absent the analytical framework for expressing the balance of payments as a monetary phenomenon, when crises hit even today staff are left flailing, and just produce tables to prop up documents at the back which are riddled with nonsense and inconsistencies.
Back to Polak. When in the 1980s the IMF’s Research Department produced an exposition of the MABP, Polak was concerned they were trivializing the need for iteration with the BOP proper thus:
"…is, I believe, mistaken in attributing the need for an iterative procedure to the introduction into the model of the equation for imports … It appears to confuse this technical aspect of the model with what is a good reason for choosing the slow road of iteration in ...
considering policy alternatives, namely that the choice of target value, … cannot be finally made until its consequences on the dependent variables are fully worked out. If the result of adopting one set of ‘targets’ turns out to be too harsh to be acceptable, ...
targets may be adjusted, instruments may be reset and, perhaps, new instruments may need to be devised to bring about more favorable values…"
So the iterative process was about understanding the general equilibrium imprint of any particular set of monetary targets, and ensuring they make sense from the perspective of the economy’s capacity to generate the foreign exchange (without resorting to depression.)
On the occasion of his Festschrift in 1990, Polak’s work was described in this way:
"Almost thirty-five years after his seminal 1957 paper was published, virtually all Fund-supported adjustment programs still exploit this key linkage between domestic credit and ...
"Almost thirty-five years after his seminal 1957 paper was published, virtually all Fund-supported adjustment programs still exploit this key linkage between domestic credit and ...
... the balance of payments and still employ domestic credit ceilings as a performance criterion… [Polak’s model] was not quite making bricks without straw, but it certainly moved us a lot closer to it at a time when very little straw was available."
END.
