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THE KEYNESIAN-MONETARIST CONTROVERSY IN INTERNATIONAL ECONOMICS: DISCRIMINATORY POWER OF LONG-RUN EMPIRICAL TESTS

ABSTRACT

Two major theories in the area of balance of payments are the Keynesian and monetarist theories. There have been many long-run tests of the monetary approach to the balance of payments and the evidence has been used to support the monetary approach. This paper argues that most of the existing empirical work does not have any discriminatory power. Long-run empirical models can discriminate between a simple Keynesian cross and a monetarist approach, but they cannot discriminate between a monetarist and a standard IS-LM model because the monetary equation is the LM schedule in an IS-LM model. This paper recommends that Keynesian and monetarist views about the transmission mechanism ...

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