A Guide to International Monetary Economics,
Third Edition

Introduction 1
1 Asset models 5
1.1 Introduction 5
1.2 Global monetarism 8
1.3 Monetary models 9
1.4 Portfolio models 27
1.5 Conclusion 37
Appendix 1.1 Jensen’s inequality and Siegel’s paradox 38
2 IS/LM for an open economy 40
2.1 The basic model 40
2.2 Macroeconomic policy in a fi xed-but-adjustable peg system 43
2.3 Macroeconomic policy with free-fl oating exchange rates 55
2.4 Portfolio analysis and international capital movements 64
2.5 Overshooting 67
Appendix 2.1 Limitations and variants 69
Appendix 2.2 Devaluation, the trade balance and the terms
of trade 74
3 Dependent-economy models 80
3.1 The Australian two-sector model 80
3.2 The balance of payments in a fi xed-peg system 82
3.3 Flexible exchange rates 96
3.4 Adding a third good 104
4 The long and very long periods 107
4.1 The long period 107
4.2 Purchasing power parity 115
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vi A guide to international monetary economics
4.3 The very long period 122
4.4 Conclusion 122
5 Exchange-rate policy 123
5.1 Introduction 123
5.2 Exchange-rate system and exchange-rate policy 124
5.3 Current-account disequilibria and capital-market integration 141
5.4 Policy coordination 148
5.5 Payments restrictions 159
5.6 Payments liberalisation 166
5.7 Conclusions 178
6 Monetary unions 180
6.1 What is a monetary union and what is the use of it? 180
6.2 Disadvantages of monetary union 183
6.3 Optimum currency areas 189
6.4 Potential problems of monetary union 196
6.5 European monetary union 199
6.6 Offi cial dollarisation 212
6.7 Final observations 214
Appendix 6.1 Monetary unions in history 215
References 221
Index 251