This paper utilizes a new formulation of the determination of capital flows within a Keynesian framework. In the basic spirit of Professor Metzler's pioneering work, capital flows and interest rates are determined simultaneously by the savings and investment behaviour in both countries. The question posed by Metzler was whether the existence of capitals flows decreased or increased the role of gold movements in the process of international adjustment. This study concludes that if capital is freely mobile, any real disturbance in the system may not require any gold flow whatever, and on a priori grounds one cannot even say if the gold flow will be positive or negative.

A research strategy is suggested that separates the issue of inference from the problems of prediction or of quantitative policy analysis of an empirical parametric model and illustrates a new methodology that enables this in a test for prima facie causality. Unlike the conventional parametric test, the more powerful multiple rank F test is invariant to monotonic transformations of the variables and independent of the error distribution. Employing this test, the Wagnerian hypothesis, supported by conventional parametric analysis, is rejected and the conventional Keynesian theory is accepted.

[Using a general definition of a generalized inverse of a singular matrix we generalized the k class and three stage least squares procedures so that they can be applied when the sample size, say T, is smaller than the number of exogenous variables, say K, in a system of equations. These generalized k class and three stage least squares estimators, in usual cases, coincide with ordinary least squares and Zellner's [7] efficient estimators respectively as long as T @ extless K and coincide with the usual k class and three stage least squares estimators respectively as T exceeds K.]