In the particular case of Australia in the 60’s and early 70’s, the policy makers attempted to increase interest rates by contracting the money supply. They did succeed in controlling rates, but there actions had other consequences, as Porter states, “The question is not whether interest rates can be controlled but rather whether the sale of bonds required to enforce the policy is so great, and the induced increase i

n foreign reserves so substantial, that the policy fails because of the resulting disruption to the balance of payments.” The capital inflow brought about from such a policy can be large enough so that foreign reserves grow considerably introducing the possibility of speculative inflows. These inflows also bring with them an increased chance that the money supply will become unstable. Also, the rise in interest rates would add to any speculative pressure making the probability of a revaluation more likely. If people believe that a currency will be revalued, it’s value rises vis-à-vis other currencies, they will buy up securities or convert their funds so that when the revaluation does occur, they will make a capital gain. The apparent cycle created by a policy such as this may have an adverse impact than the one intended by the central bank.

1971.2 0.1 0.5 -175 -457.1 2077 564

Because, as I mentioned above, Porter found that a change in wealth did not have significant impact on the amount of net capital flow it is dropped from the final estimated model. The final estimated model is shown below.

Some topics in this essay:
Australia Porter, SPEC NCF, Australia” Porter’s, Cochrane-Orchutt GLS, Porter Eurodollar, Based R­­2, SPEC Eq, Econometric Analysis, Specifically Australian, monetary policy, capital flows, money supply, eq 3, capital flow, = change, degrees freedom, statistically significant, central bank, foreign rates, monetary policy capital, MG Porter, current account balance, reject null hypothesis, test reject null, based test reject,