ABSTRACT
My purpose in this chapter is to present the main outline of a new approach to the theory of the balance of payments and of balance-of-payments adjustment (including devaluation and revaluation) that has been emerging in recent years from several sources. Concretely, this new approach is to be found on the one hand in the change in policy orientation adopted by the British government under pressure from the International Monetary Fund after the failure of the devaluation of 1967 to produce the expected improvement in the British balance of payments, the theoretical basis for the new orientation being traceable back to the work of the Dutch economist J. J. Koopmans; and on the other hand to the theoretical work of my colleagues at the University of Chicago, R. A. Mundell, and his students – though it is only fair to note that economists elsewhere have been working along similar lines. Its essence is to put at the forefront of analysis the monetary rather than the relative price aspects of international adjustment.
