ABSTRACT
The monetary approach to external equilibrium is essentially a postwar development which evolved in response to the IMF's search for a monetary framework within which balance of payments policies could be evaluated. The non-monetary approach to external equilibrium focuses on autonomous international flows of goods, services and capital, so that balance of payments disequilibrium results from inequality between autonomous credit and debit transactions. The monetary approach to external equilibrium also applies to floating exchange rates, although the adjustment process differs. Floating exchange rates maintain continuous external equilibrium through exchange rate fluctuations and establish internal monetary equilibrium through domestic price changes. External disequilibrium is considered a monetary phenomenon resulting from stock imbalances between the demand for and supply of money. Internal monetary equilibrium is restored through exchange rate changes which, operating through domestic price changes, change the value of the nominal money stock. Domestic price changes generate policy implications which also appear mutually inconsistent.
