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Throughout his career, Leland B. Yeager has extended his contributions to domestic monetary theory to the realm of international economics. While he has written in the area of pure trade theory (Yeager and Tuerck 1976, for example), his most significant contribution is probably his International Monetary Relations (1966,1976), a landmark book which soon became the standard reference in the field of international money and finance. This paper focuses on the many contributions of that seminal work.
At the time of publication, Yeager's book was unique in several ways. First, it was highly unusual for a book in international economics to focus solely on the monetary aspects of the subject. By the time of the second edition, a monetary approach to international economics had again become fashionable. second, his book is evenly divided between theory and historical narrative. (Friedman and Schwarte1 s 1963 narrative had been published only three years earlier.) In the latter half of his text Yeager provides a history of the international monetary system in the twentieth century. His purpose is to focus on the policy lessons that can be learned from the historical experiences in the light of economic theory. Third, his book was probably the most balanced and thorough presentation of the case for freely floating exchange rates.
The first half of the book focuses on the automatic adjustment mechanisms that operate under a system of fixed and freely floating exchange rates. These two systems provide a contrast to the system then in existence: the Bretton Woods system of fixed-but-adjustable exchange rates. Unlike the other two systems, this one lacked any automatic adjustment mechanism. The consequences of this deficiency are developed throughout the book.
The adjustment mechanisms under fixed and floating rates
Under a fixed rate system, a country experiencing a balance-of-payments deficit must undergo deflation. If prices are not sufficiently flexible for full adjustment, then real income must also fall. This much is standard fare. However, Yeager focuses on two other mechanisms that are often overlooked: the cash-balance effect and relative price adjustments.
One of the themes of Yeager1 s domestic monetary theory is the cash-baknce effect, which he here applies to the international sector. He argues (1966, p. 64):
In the...deficit country, the cash balances of individuals and...