Balance of Payments Adjustment and Portfolio Theory : A Survey

This paper covers a broad field with many threads going far back in history. It is surprising how much understanding there was of the international payments system and its functions by authors such as Hume, Ricardo, Thornton and John Stuart Mill. It is even more amazing, though, how so many of these earlier insights could be forgotten for such a long time. It was not until what I have called the Mundell-Johnson epoch in the 1960s that an understanding of the internaional monetary system was once again reached. What remained to be done then and what is being done now is to build models that account for many assets in an increasingly, but perhaps not yet completely, integrated international credit and goods market. The important and difficult future task of designing short-run adjustment models is left to the next generation. My aim has been to follow the broad lines in the development up to the late 1960s and to report on the results shown by them. Following this there is a more detailed study of most of the contributions in recent years. In these later studies I have tried to give a glimpse of the typical features of the model construction and the main conclusions. It has been my ambition to simplify and to bring forth the important aspects of these models. For this reason I have written a special section to compare many of the models and to show their similarities and differences. It has not been possible to consider the problems of growth and devaluation and their effects on the balance of payments