The Positively Sloped IS Curve and the Balance of Payments: An Extension of Cebula's Model

Yannacopoulos, Nicos A. A icle The Posi i ely Sloped IS Cu e and he Balance o Paymen s: An Ex ension o Cebula's Model K edi und Kapi al P o ided in Coope a ion wi h: Duncke & Humblo , Be lin Sugges ed Ci a ion: Yannacopoulos, Nicos A. (1982) : The Posi i ely Sloped IS Cu e and he Balance o Paymen s: An Ex ension o Cebula's Model, K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 15, Iss. 2, pp. 275-279, h ps://doi.o g/10.3790/ccm.15.2.275 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/292928 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. 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In oduc ion In his pape en i led "The Upwa d Sloping IS Cu e and he Con ol o Income and he Balance o Paymen s" Ba ows (1974) in es iga ed, among o he s, he e ec s o mone a y and iscal policy on he balance o paymen s. He assumed ( ollowing Silbe (1971)), ha he posi i ely sloped IS cu e is ob ained i all he p opensi ies o spend ou o income sum o mo e han uni y. Howe e , in ano he con ibu ion, Cebula (1976) e ained he s anda d assump ion ha he p opensi ies o spend ou o income sum o less han uni y, bu ollowing he sugges ions by Ya ow (1975) and Webe (1970) he assumed ha consump ion and in es men a e inc easing unc ions o he a e o in e es . These as- sump ions a e also consis en wi h a posi i ely sloped IS cu e. The policy implica ions o Cebula1 s model in a closed economy ha e been in es iga ed by Cebula himsel (Cebula 1976), and Ta las (1980). The pu pose o his pape is o ex end he analysis, wi hin he amewo k o Cebula's model, o include he e ec s o mone a y and iscal policy on he balance o paymen s, unde a ixed exchange a e egime. II. Cebula's Model and i s Ex ension Following Ba ows (1974) we can w i e a model o an open economy, he equilib ium condi ions o which a e: (1) Y = C0 + C (Y, i) + I0 + I (Y, i) + B (Y) + G (commodi y ma ke ) (2) L0 + L (Y, i) = M0 + K (i) (money ma ke ) (3) F = B (Y) + K (i) (balance o paymen s) The no a ion is s anda d: Y = income, I = in es men , C = consump ion, i = he a e o in- e es , L = he demand o money, Mo = he supply o money, G = go - OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.15.2.275 | Gene a ed on 2023-01-16 12:47:44 276 Nicos A. Yannacopoulos e nmen spending, B = he ne balance o ade, K = he ne capi al in low, and F = he balance o paymen s unc ion. Co, lo, Lo a e le els o consump ion, in es men and demand o money, espec i ely, which do no depend on changes in income o he a e o in e es . Di - e en ia ing equa ions (1), (2) and (3) gi e: (4) dY = dCo + CydY + C{ di + dl0 +IydY + l{ di + BydY + dG (5) dL0 + LydY + L{ di = dM0 + di (6) dF = By dY + K di whe e Cy is he ma ginal p opensi y o consume ou o income ly he ma ginal p opensi y o in es ou o income, Q and Ii he esponse o C and I o a change in he a e o in e es , Li he esponse in he demand o money o a change in he a e o in e es , Ly he esponse in he demand o money o a change in income, Ki he esponse o ne capi al low om ab oad o a change in he a e o in e es and By he esponse o he balance o ade o a change in income. The ollowing es ic ions a e imposed on he sys em: 1 > Cy > 0 , 1 > Iy > 0 , Ly> 0 , L < 0 , K{ > 0 , By <0 Cebula (1976), howe e , assumes ha in e es esponsi eness o bo h consump ion and in es men a e posi i e (i.e. Ci > 0, h > 0) and he p opensi ies o spend ou o income sum o less han uni y (i.e. Cy + Iy<C 1) so ha he slope o he IS cu e: di 1 — Cy — ly — By (7) = — > 0 W dY Ci + Ii This is consis en wi h he condi ion o s abili y in Cebula1 s model: -U, (8) - Cy~ ly - B?J Ci + Ii > (Li - Ki) which says ha he sys em is s able i he slope o he LM cu e ( he igh hand e m) is less han he slope o he IS cu e ( he le hand e m). The equa ions (4), (5), and (6) can be sol ed o he h ee endogeneous a iables dY, di and dF. Ba ows (1974, p. 957) gi es he solu ion o dF (which in e es s us he e), om which he de i es he ollowing policy mul iplie s (Ba ows, 1974 p. 958 and p. 960): OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.15.2.275 | Gene a ed on 2023-01-16 12:47:44 Posi i ely Sloped IS Cu e and he Balance o Paymen s 277 (9) (10) êF = - {(1 ~ Cy - ly - By) Kj + By (Ci + Ij)} ÏÏM0 - {(1 -Cy-Iy- By) (Li - Ki) + ('Ci + I{) Ly} &F ô G Ly Ki — By (Li Kù - {(1 -Cy-Iy- By) (Li - Ki) + (Ci + li) Ly} I can be easily shown ha , unde Cebula1 s assump ions and gi en he condi ion (8), he denomina o in he mul iplie s (9) and (10) is posi i e. Whe he he ne ou come o an inc ease in money supply (o he go - e nmen expendi u e) on he balance o paymen s is un a ou able / &F / #F &F Um^ < < 0 ) o a ou able > 0, > 0 j will de- pend on he nume a o o he mul iplie s (9) and (10). # F The condi ion o (11) o (12) #M0 <0is: (1 -Cy-Iy- By) > By (Q + /¿) (j -Cy-Iy- ci + h By) > Bn, K{ This means ha a de ici in he balance o paymen s a e a mone a y expansion occu s i he slope o he IS cu e ( he le hand e m o (12)) is g ea e han he slope o he FF' cu e ( he igh hand e m o (12)), i.e. he cu e exp essing he condi ions o equilib ium in he o eign sec o .1 êF >0 is: And he condi ion o ^M^ (13) (1 -Cy-Iy- By) K{ < By (Q + Ij) o (14) ly ~ BJJ Ci + h < Ki Which says ha he slope o he FF' cu e is g ea e han he slope o he IS cu e. These condi ions a e no he same wi h hose de i ed by Ba ows (1974) o he Silbe -Ba ows model. To be mo e p ecise he condi ion 1 The FF' cu e is he locus o pai s o i and Y which p oduce balance o paymen s equilib ium. I s slope is ob ained by di e en ia ing equa ion (3). FF' cu e is he same wi h Ba ow's HH cu e (Ba ows, 1974, p. 958). 19 K edi und Kapi al 2/1982 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.15.2.275 | Gene a ed on 2023-01-16 12:47:44 278 Nicos A. Yannacopoulos o a de ici in he balance o paymen s a e a mone a y expansion in Cebula1s model in he same wi h he condi ion o a su plus in he Silbe -Ba ows model; and he condi ion o a su plus in he balance o paymen s a e a mone a y expansion in Cebula's model is he same wi h he condi ion o a de ici in he Silbe -Ba ows model. The condi ion o - êF ê G (15) <0 is: Ly Ki < By (Lj — K-i) o (16) Li — Ki < Bu Ki i.e. a de ici in he balance o paymen s occu s, ollowing an expansion in he go e nmen expendi u e when he slope o he LM cu e is less han he slope o he FF' cu e. And i is easily e i ied ha a su plus in he balance o paymen s occu s when he slope o he LM cu e is g ea e han he slope o he FF cu e. These condi ions a e he same wi h hose de i ed by Ba ows (1974). III. Conclusions I u ns ou ha he di e en assump ions on which Cebula's and Silbe 1 s models a e based a ec only he condi ions unde which an ex- pansiona y mone a y policy a ec s he balance o paymen s. The con- di ions o he e ec s o he iscal policy emain he same in bo h models. Re e ences Paul Ba ows (1974): "The upwa d sloping IS cu e and he con ol o income and he balance o paymen s". The Jou nal o Finance. — Richa d J. Cebula (1976): "A b ie no e on economic policy e ec i eness" Sou he n Economic Jou nal. — William L. Silbe (1971): "Mone a y policy e ec i eness: he case o a posi i ely sloped IS cu e". The Jou nal o Finance. — Geo ge Ta las (1980): "Economic policy e ec i eness in Hicksian analysis: an ex- ension" K edi und Kapi al. — Wa en Webe (1970): "The e ec s o in e es a es on agg ega e consump ion" Ame ican Economic Re iew. — Geo ge Ya ow (1975): "G ow h maximisa ion and he i m's in es men unc ion" Sou he n Economic Jou nal. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.15.2.275 | Gene a ed on 2023-01-16 12:47:44 Posi i ely Sloped IS Cu e and he Balance o Paymen s 279 Zusammen assung Posi i e lau ende IS-Ku en und die Zahlungsbilanz: eine E wei e ung des Cebulaschen Modells Diese Bei ag be aß sich mi den bei es en Wechselku sen im Rahmen des Cebulasehen Modells au e enden Auswi kungen de Geld- und Finanz- poli ik au die Zahlungsbilanz und e gleich sie mi den on Ba ows e - hal enen E gebnisse ü das Modell on Silbe -Ba ows. Es wi d es ges ell , daß die un e schiedlichen Annahmen des Cebula sehen und des Silbe -Ba o uschen Modells lediglich die Bedingungen beein lussen, un e denen eine expansionis ische Geldpoli ik eine Wi kung au die Zah- lungsbilanz ausüb . In beiden Modellen bleiben die Bedingungen ü eine Beein lussung du ch die Finanzpoli ik gleich. Summa y The Posi i ely Sloped IS-Cu e and he Balance o Paymen s: An Ex ension o Cebula's Model This pape deals wi h he e ec s o mone a y and iscal policy on he balance o paymen s wi hin he amewo k o Cebula's model, unde a ixed exchange a e egime, and compa es hem wi h he esul s ob ained by Ba ows o he Silbe -Ba ows model. I is ound ha he di e en assump ions on which Cebula's and Silbe - Ba ows model a e based a ec only he condi ions unde which an ex- pansiona y mone a y policy a ec s he balance o paymen s. The condi ions o he e ec s o he iscal policy emain he same in bo h models. Résumé Les cou bes posi i es In es issemen -Epa gne e la balance des paiemen s: une ex ension du modèle de Cebula L'a icle s'in é esse dans un égime de aux de change ixes e dans le con ex e du modèle de Cebula aux e e s de la poli ique moné ai e e inanciè e su la balance des paiemen s e les compa e aux ésul s ob enus pa Ba ows su le modèle de Silbe -Ba ows. L'au eu é abli que les di e ses hypo hèses des modèles de Cebula e de Silbe -Ba ows n'in luen que su les condi ions dans lesquelles une poli ique moné ai e expansionnis e exe ce une ac ion su la balance des paiemen s. Dans les deux modèles, les condi ions d'in e en ion de la poli ique inanciè e demeu en iden iques. 19* OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.15.2.275 | Gene a ed on 2023-01-16 12:47:44