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A Case for Managed Exchange Rates

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  • MARTIN F. J. PRACHOWNY

Abstract

The incorporation of adaptive expectations by Dornbusch in a Mundell‐Fleming model modifies significantly the traditional results of policy effectiveness in a small, open economy. While monetary policy is still able to influence aggregate demand when flexible exchange rates prevail, the effects of this policy on other important variables in the economy during the adjustment process to a new equilibrium may be considered sufficiently ‘disruptive’ so that the authorities will be hesitant to use their only fully‐effective policy instrument for income‐stabilization purposes. However, by adding a target level for the exchange rate to their list of goal variables and by using an appropriate mix of monetary and fiscal policies, it appears to be possible for the government to avoid these disruptive side effects.

Suggested Citation

  • Martin F. J. Prachowny, 1979. "A Case for Managed Exchange Rates," The Economic Record, The Economic Society of Australia, vol. 55(2), pages 156-163, June.
    • Handle: RePEc:bla:ecorec:v:55:y:1979:i:2:p:156-163
    DOI: 10.1111/j.1475-4932.1979.tb02215.x
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    1. Turnovsky, Stephen J., 1976. "The dynamics of fiscal policy in an open economy," Journal of International Economics, Elsevier, vol. 6(2), pages 115-142, May.
    2. Thomas F. Dernburg, 1970. "Exchange Rates and Co-ordinated Stabilization Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 3(1), pages 1-13, February.
    3. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-248.
    4. Niehans, Jurg, 1975. "Some doubts about the efficacy of monetary policy under flexible exchange rates," Journal of International Economics, Elsevier, vol. 5(3), pages 275-281, August.
    5. Scarth, William M, 1975. "Fiscal Policy and the Government Budget Constraint under Alternative Exchange-Rate Systems," Oxford Economic Papers, Oxford University Press, vol. 27(1), pages 10-20, March.
    6. Dornbusch, Rudiger, 1976. "Exchange rate expectations and monetary policy," Journal of International Economics, Elsevier, vol. 6(3), pages 231-244, August.
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