ABSTRACT
There is therefore an urgent need to overcome these limitations and to allow for international capital ”ows to appear in the balance of payments that are not limited by the savings behavior of the domestic economy. This implies that domestic bond demand and supply (of both types of bonds) must be reformulated in terms of ”ows and that the same must be done for foreign demand (or supply) of domestic bonds and foreign supply (or demand) of foreign bonds. We thus have now not only an export function on the market for goods (the goods demand of foreigners), but also their demand and corresponding supply schedules on the international bond markets where domestic and foreign bonds are traded against each other. This enhances the degree of openness of the economy under consideration and allows
us to consider the situations of capital ”ight investigated in Chapters 13 and 14 in more detail than was possible there. In Section 15.2 of this chapter we will enlarge the MFT model in the way discussed above. Section 15.3 will then consider the implications of such an approach to international capital ”ows for the small economy case.
