On Mon, October 19, 1998 at 14:22:16 (-0700) James Devine writes: >> [I wrote] >> [Exports from from England to Japan cause:] >> o Supply of Yen drops in Japan, causing an interest rate rise >> o Supply of Yen rises on exchange, causing price of Yen to drop >> o Supply of Pound drops on exchange, causing price of Pound to rise >> o Supply of Pound rises in England, causing an interest rate drop > >I think the problem here is there's a confusion of the supplies of money >and loanable funds, which help to determine the interest rate, and the >supply of currency, which helps to determine the exchange rate. What is the difference between the supplies (?) of money and loanable funds? Are there supplies of money which are not loanable? Aside from cash under the mattress, what money is not loanable? If an importer uses her bank account (presumably, pace Post Keynesians, debt, not currency) for the transaction, there is no currency involved. S. C. Tsiang says (in "Loanable Funds" in *The New Palgrave: Money*, p. 190) that "loanable funds are simply sums of money offered and demanded during a given period of time for immediate use at a certain price". *The MIT Dictionary of Modern Economics* says that it "means funds available for lending in financial markets". *The MIT Dictionary* notes that the term really means a "flow" theory of interest rates which is contrasted with Keynes' "stock" liquidity preference theory, and the "more complex modern" theories, such as the "portfolio balance approach" (rooted in Keynes' GT, developed primarily by Tobin). It seems that whatever money is in the "capital/money market" is a loanable fund. How would money from an importers bank account not be in the capital market? Or, money that is in the Foreign Exchange? Tsiang says that money exits the "circular flow" and enters the money market by "saving". But I thought that this was a rather primitive way to view the creation of money: money is created by issuing debt, and can occur throughout a capitalist economy. >But I would restate the story as follows: > >* the Bank of Japan reduces the supply of money (perhaps via an open-market >purchase of Japanese treasury bonds, though I don't know how they do >monetary policy), driving up the interest rate on Yen-denominated assets. Why would they do this? What if they did not? What I really would like to know is, How do Japanese importers actually pay for their imports? If they import a ship full of wool sweaters from England, do they essentially write a check? That is, do they go to their bank and say "We need a cashier's check for 1 million Pounds", at which point the bank pulls out from the importer's account and exchanges the necessary amount of Yen in the forex market for this amount of Pounds, then handing over this (check, cash?) to the importer. If the forex market is "linked", along with the importer's bank account, into the money market, then there would be no net change in the amount of Yen in Japan (the debit in the importer's bank account would be matched by an equivalent credit in the account(s) of the person(s) who gave up Pounds in the Forex market). Bill
