The thesis performs a monetary analysis of Australia's managed float. Its purpose is to examine the simultaneous adjustment of both exchange rates and the balance of payments (changes in reserves) in Australia for the managed floating regime during the period 1984Ql to 1994Q3. The Girton-Roper managed float (1977) model of 'exchange market pressure' is employed for this analysis.
The Girton-Roper monetary model is a theory of exchange rate determination applicable for all types of exchange rate regimes. The model draws on a combination of elements of the Monetary Approach to the Balance of Payments (applicable to fixed regimes) and the Monetary Approach to the Exchange Rate (applicable to floating regimes). In essence, it extends the Flexible Price Monetary model for exchange rate determination, by explicitly including the balance of payments. It also allows for the relaxation of the purchasing power parity (PPP) condition, one of the key underlying assumptions of both the Monetary Approach to the Balance of Payments and the Monetary Approach to the Exchange Rate.
The Girton-Roper Monetary model was derived to explain both exchange rate movements and official intervention in a managed exchange rate regime. The dependent variable, 'exchange market pressure' (EMP), is the pressure on foreign exchange reserves and the exchange rate, when there exists an excess of domestic money supply over money demand in a managed floating exchange rate regime. The basic theoretical proposition is that the excess of supply of money can be relieved by an exchange rate depreciation, loss in reserves, or, in a managed float regime, by some combination of the two. This approach provides a useful framework within which to estimate the degree of autonomy of Australia monetary policy.