Redundancy problem
In international finance, the redundancy problem, also known as the n − 1 problem, is a problem of inequality of the number of policy instruments and the number of targets at the international level,[1] suggested by Robert Mundell in Robert Mundell (1969).[2][3]
This problem does not occur at the one-country level.[2]
Suppose the number of countries in the world is n. Because this world is closed, one country's balance of payments surplus must be equal to another's deficit, and vice versa. Thus the sum of all countries' net payments positions must be zero. Therefore, if n − 1 countries out of n countries have determined their balances of payments, that of the nth country is determined automatically.[4] This fact implies that, if all of the n countries have payments objectives, only n − 1 countries can achieve the payments objectives. In other words, all of the payments objectives can not be achieved simultaneously.
Similarly, if there are n currencies in the world, only n − 1 exchange rates can be "independent" because the exchange rate is a price of one money relative to another.[4] Other rates which are not independent are calculated as cross rate.
There are only n − 1 countries to be determined, which implies the n th country is required to refrain from intervening its exchange rate. Benign neglect is one example for this fact.[5][6]
References
- ↑ Ronald Winthrop Jones; Peter B. Kenen (1984), Handbook of International Economics, Volume 2, Elsevier, p. 1186
- 1 2 Giancarlo Gandolfo (1995), International Economics Two., Springer Science & Business Media, p. 227.
- ↑ Ronald McKinnon (2010), Rehabilitating the Unloved Dollar Standard (PDF), Working Paper No. 419, Stanford Center for International Development, p. 2
- 1 2 Alan Professor Winters (2002), International Economics, Routledge, p. 397.
- ↑ Ronald Winthrop Jones, Peter B. Kenen. Handbook of International Economics, Volume 2. p. 1186.
- ↑ Maria Cristina Marcuzzo; Lawrence H. Officer; Annalisa Rosselli, eds. (2002), Monetary Standards and Exchange Rates, Routledge, p. 38
- Robert Mundell (1969). Robert Mundell and Alexender. K, and Swoboda., ed. "The Redundancy problem and the World price level". Monetary problems of International Economy. Chicago university: 379–382.