Students of balance of payments theory are undoubtedly familiar with the various discussions concerning the use of monetary‐fiscal policies to attain internal and external balance. The seminal contributions to this particular branch of balance of payments theory are commonly associated with...

In his commentary on our recent contribution, Rodney Thom (1976) singles out three points for discussion. He maintains that our model ignores (1) the relative size of economy under analysis; (2) the interdependence of inflation rates between countries operating under fixed exchange rates; and...