Money, Credit, and Euro-Dollars

Two Interesting papers at this session treat different aspects of the Euro-dollar market. Ronald McKinnon describes some of the services performed by the market and distinguishes between money and credit. The distinction is elementary, but important because it is often neglected. Neglect has given rise to incorrect inferences about the effect of the Euro-dollar market on inflation, as McKinnon notes. Dale Henderson and Douglas Waldo analyze the effect of putting reserve requirements on Euro-dollars. They show that, in a model with a single rate of interest and fixed exchange rates, reserve requirements on Euro-dollars reduce the variance of the money stock — demand deposits and currency — around its target value. With fluctuating exchange rates, the result is ambiguous. One point should be emphasized, but isn't; the effect of reserve requirements on Euro-dollars depends on monetary and other institutional arrangements and on assumptions about the new substitutes that will develop in response to the change. McKinnon points out that taxation of interest payments, trade liberalization and other arrangements cannot be neglected.