Redundancy problem
In international Finance, Redundancy problem, also known as n-1 problem, is a problem of inequality of the number of instruments and the number of targets at international level,[1] suggested by Robert Mundell in Robert Mundell (1969).[2][3] This problem doesn't occur at one-country level.[2]
Here we suppose the number of countries in the world is n. Because this world is closed, one country's surplus must be equal to another's deficit, and vice versa. Thus the sum of all countries' net payments position must be zero. Therefore if n − 1 countries out of n countries have determined their balances of payments, that of n th country is determined automatically.[4] This fact implies that, if all of the n counties 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 relative prices because the exchange rate is a price of one money relative to another.[4] This fact implies that the degree of freedom for independence is given to only one country (as to the United States under the dollar standard).[5]
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.
- ↑ Maria Cristina Marcuzzo, Lawrence H. Officer, Annalisa Rosselli, ed. (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.