STERILISATION AND THE EXCHANGE EQUALISATION ACCOUNT*
| DOI | http://doi.org/10.1111/j.1467-9485.1981.tb00093.x |
| Author | David Cobham |
| Date | 01 November 1981 |
| Published date | 01 November 1981 |
Scottish
lournol
ofpolitical
Economy,
Vol.
28,
No.
3,
November
1981
Q
19x1
Longman
Group
Limited
0036-9292/8
1/00220278
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STERILISATION AND THE EXCHANGE
EQUALISATION ACCOUNT*
DAVID COBHAM
University
of
St
Andrews
A
number of papers’ have recently examined the effects of the balance of
payments on the monetary aggregates in the
U.K.,
taking account
of-
amongst other factors-the workings of the Exchange Equalisation Account
(EEA), the account at the Bank of England through which official intervention
in the foreign exchange market takes place. However there has been no
discussion of the assertion of earlier writers2 that the EEA provides an
automatic mechanism
of
sterilisation which prevents balance of payments
deficits or surpluses from affecting the money supply. Such a mechanism
would mean that causation runs from the balance of payments to domestic
credit expansion
(DCE),
rather than in the opposite direction
as
generally
assumed within the monetary approach to the balance of payments (MAB)
:
the existence
of
such a mechanism would make the MAB largely inapplicable
to the
U.K.
and is therefore of considerable importance.
Table 1 provides a convenient way of analysing the effects of official
intervention being carried on through the EEA, under different assumptions
about the workings
of
the monetary system and the immediate behaviour
of
the monetary authorities in cases
of
balance
of
payments disequilibrium. It
focuses on the most important of the various flows discussed in Bank of
England (1975) and Miles and Bull (1978), namely a current or capital account
inflow into the bank deposits of
resident^,^
and shows the impact and
secondary effects on the growth
of
the money supply and the effect on
DCE.
The different assumptions considered include, on the one hand, cases where
bank deposits are determined (a) as a multiple of the banks’ holdings of cash,
(b) as a multiple
of
their holdings of reserve or liquid assets, and (c) by other
factors
;4
and on the other hand cases where official intervention occurs
through the EEA or through the kind of institutional arrangements which are
common in other countries and which existed in the
U.K.
before the EEA was
*
I
am grateful
to
Dennis Coppock for pointing out an
error
in an earlier draft
of
this
note.
Any
’
e.g. Bank
of
England (1975), Lomax and Mow1 (1978), Miles and Bull (1978).
further shortcomings are entirely my responsibility.
e.g. Johnson (1958, p. 157), Mundell(l968, p.
281).
Such flows (including the opposite case, a current
or
capital account outflow from residents’
bank deposits) are the most important both quantitatively, in terms
of
their weight in total balance
of
payments flows, and qualitatively, as being roughly co-terminous with the flows included in a
basic balance definition of the balance of payments.
&e.g. by quantitative controls
on
deposits
or
on
lending, with the supply
of
liquid
or
reserve
assets determined by the banks’ demand.
Date of receipt of final manuscript
:
20
February
1981.
218
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