INTEREST RATE, REAL BALANCE, AND FOREIGN EXCHANGE RATE (1)

The Exchange Stability or Analysis of Devaluation has been analysed not in terms of the monetary factors such as interest rate, supply of money and assets, but in terms of real factors such as national income and prices. Indeed it increases the difficulties to include these monetary variables into the existing analysis of devaluation, but we cannot continue to neglect the monetary aspect. I published a series of articles with the same title as this paper on The International Economics Study Series (1959. 9) in order to establish that theory of exchange stability or analysis of devalution which integrated the real aJnd monetary analysis. And this paper does aim an analysis of devaluation in the system that includes both the real and monetary aspects. I employ the very convenient concept of the "marginal leakage coefficient" originated by J. Spraos. So his theory is reviewed to understand that concept well. The system under consideration is called stable or unstable according to positive or negative marginal leakage coefficient. Then my models are carefully constructed step by step. First, the model of closed system where the real balance effect is neglected is considered. Secondly, we are led to the model of open system based on the same assumption regarding the real balance effect as the one of closed system. From the consideration of open model it will be clear that the exchange stability does need the following condition :[numerical formula] where λ : the marginal leakage coefficient, η : the price elasticity of demand for import (positive), μ: the "total" marginal propensity to import, M: the demand for import, E: the total real expenditure, t: the terms of trade, γ : the interest rate, e : the price elasticity of supply, y: the total supply. Subscripts h and f refers to the home and foreign country respectively. And the home country devaluates its exchange rate. And with the plausible assumptions we have (∂E)/(∂t)>O, (∂E)/(∂γ)0, and μ>0. But it must be noticed that we neglected the international capital movement based on the difference between interest rates. Moreover, I showed the model that included effects of the real cash balance and a possible route for determining the sign of unknown coefficient. I will refer to these matter in the column of next issue. (To be continued)6KJ00005072329departmental bulletin pape