The Monetary Approach to Official Reserves and the Foreign Exchange Rate in France, 1962-74: Some Structural Estimates.

This article attempts an analysis of official reserves and the foreign exchange rate in France, covering both fixed exchange rates and flexible exchange rates, that is, 39 quarters of fixed rates, 1962.1-1971.3, and 13 quarters of flexible rates, 1971.4-1974.4. The cost is the presence of errors in the simultaneous equation estimates of the exchange rate during the period of fixed rates. But the benefit is an econometric analysis founded on 52 observations, and yet covering three years of flexible rates. Since the errors in the estimates of the exchange rate under fixed rates are quite moderate, the cost would seem to be worth the benefit. The most important characteristic of this work is the use of a detailed structural model of bank credit and money in testing the monetary approach. The article examines the extent to which varying and tenable money measures in France yield convergent results. It take real income as given and ignores the balance of trade and the terms of trade. By eschewing information about absorption or the terms of trade, anything to do with imports or exports of commodities as such, it avoids this restriction and examines a particularly strong version of the monetary approach.