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Weak Policy in an Open Economy: The US with a Floating Exchange Rate, 1974-2009

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  • Henry Thompson

    ()
    (Economics Department, Auburn University, Auburn, AL 36849, U.S.A.)

Abstract

This paper examines the effectiveness of US macroeconomic policy in an open economy model focused on the exchange rate and trade balance. Yearly data cover the period of the dollar float from 1974 to 2009. Monetary expansion raises output weakly but depreciates the dollar and lowers the trade balance. Fiscal “expansion” decreases output. There is a polar deficit effect between the government budget and trade balance. These results question a number of standard policy prescriptions. The implied structural coefficients suggest rethinking a number of accepted theoretical assumptions.

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File URL: http://www.eap-journal.com/archive/v42_i3_04-H.Thompson.pdf
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Bibliographic Info

Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

Volume (Year): 42 (2012)
Issue (Month): 3 (December)
Pages: 339-350

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Handle: RePEc:eap:articl:v:42:y:2012:i:3:p:339-350

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Keywords: fiscal policy; monetary policy; exchange rate; trade balance;

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  1. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
  2. James Tobin, 1971. "Friedman's Theoretical Framework," Cowles Foundation Discussion Papers 309, Cowles Foundation for Research in Economics, Yale University.
  3. Brunner, Karl & Meltzer, Allan H, 1972. "Friedman's Monetary Theory," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 837-51, Sept.-Oct.
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