ABSTRACT

The main characteristic of the monetary approach to the balance of payments can be summarised in the proposition that the balance of payments is essentially a monetary phenomenon. The term 'the balance of payments' refers to items that are 'below the line' in the over-all balance of payments (which must balance exactly, by the principles of double-entry accounting); the items in question constitute the 'money account'. In general, the approach emphasises the budget constraint imposed on the country's international spending and views the various accounts of the balance of payments as the 'windows' to the outside world, through which the excesses of domestic flow demands over domestic flow supplies, and of excess domestic flow supplies over domestic flow demands, are cleared. Accordingly, surpluses in the trade account and the capital account respectively represent excess flow supplies of goods and of securities, and a surplus in the money account reflects an excess domestic flow demand for money. Consequently, in analysing the money account, or more familiarly the rate of increase or decrease in the country's international reserves, the monetary approach focuses on the determinants of the excess domestic flow demand for or supply of money.