External financial intermediation and the composition of the money stock.
This thesis is intended as a contribution to the literature referred
to as the "optimum currency area literature". The purpose of the
analysis developed in the thesis is to gain an understanding of the
monetary and financial implications of the actual currency area
structure of the international economy. The analysis can then be used
for the purpose of assessing whether changes in this currency area
structure might be desirable.
The theoretical material falls into three parts. Cross-country data
are used in the theoretical chapters to assess the explanatory value
of the ideas. The theoretical analysis is then applied to the
historical experience of an individual country, Argentina. Time series
data are offered for the application to the Argentine case.
The first theoretical section of the thesis is concerned with the
structure of the money supply in an economy as between its imported and
domestic components. A central tenet of the thesis is that there are
cross-country differences in the size of the imported share of the
money supply which is required for monetary and exchange rate
stability, and that these cross-country differences can be related to
structural characteristics of an economy. It is shown that the
structure of incremental money demand has important balance of
A theoretical framework for the analysis of the structure of the
money supply is developed. This framework is then used to argue that
an economy which makes more extensive use of external financial
intermediation will require a larger share of foreign exchange reserves
in the monetary base.
The second part of the theoretical analysis studies some
relationships between the currency area structure of the international
economy and patterns of international financial intermediation. It is
argued that we can identify certain structural features of a currency
area which would give rise to a tendency for residents to make use offoreign financial centres. The theoretical considerations lead to an
explanation, in terms of currency area structure, of certain crosscountry
differences in financial development.
In the third theoretical section, the analytical framework which was
developed in previous chapters is used to address three specific
questions. These questions serve to bring out some answers to the more
general question of what are the implications for an economy of using
an imported money supply. The analysis yields some new perspectives on
the monetary and financial implications of import substitution
industrialization policies, as well as on other problems and policy