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Monetary Policy: Domestic Targets and International Constraints

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  • Jacob A. Frenkel
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    Abstract

    This paper argues that macroeconomic policies for open economies differ, in fundamentally important ways, from the corresponding policies for closed economies.The openness of the economy imposes constraints on the effectiveness and proper conduct of macroeconomic policies and it also provides policy makers with infor-mation which may be usefully exploited in the design of policy. The discussion in this paper focuses on the dependence of monetary policy on the constraints and the information that are provided by the external sector. Section I summarizes briefly the characteristics of the international constraints on monetary policy.Section II deals with intervention in the foreign-exchange market and its relation to monetary policy. In this context the distinction between sterilized and non-sterilized interventions is drawn and the implications of the various forms of intarventions for the effectiveness of monetary policy are examined. Finally,Section III addresses the question of the role that exchange rates should play in the design of monetary policy. It is argued that data from the market for foreign exchange in combination with data on interest rates can provide the monetary authorities with useful information on money market conditions and thereby can contribute to the improved conduct of monetary policy.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1067.

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    Date of creation: Jan 1983
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    Publication status: published as Frenkel, Jacob A. "Monetary Policy: Domestic Targets and International Constraints." American Economic Review, Vol. 73, No. 2 (May 1983), pp. 48-53.
    Handle: RePEc:nbr:nberwo:1067

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    Cited by:
    1. Rabeau, Yves, 1986. "Les paradoxes d’une expansion en période de déflation," L'Actualité Economique, Société Canadienne de Science Economique, vol. 62(4), pages 620-628, décembre.
    2. Papell, David H., 1985. "Activist monetary policy, imperfect capital mobility, and the overshooting hypothesis," Journal of International Economics, Elsevier, vol. 18(3-4), pages 219-240, May.
    3. Kim Kyung Soo, 2000. "Foreign Exchange Intervention For Internal Balance," International Economic Journal, Taylor & Francis Journals, vol. 14(4), pages 59-75.
    4. Herrera Revuelta, Julio, 1997. "Expectativas racionales y política monetaria endógena en la determinación del tipo de cambio. Una ampliación empírica a la pseta-dolar y la peseta-ecu," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 7, pages 39-66, Junio.

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