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The Exchange Rate, The Balance Of Payments and Monetary and Fiscal Policy Under A Regime of Controlled Floating

In: Flexible Exchange Rates and Stabilization Policy

Author

Listed:
  • Michael Mussa

    (University of Rochester)

Abstract

This paper considers the extension of the fundamental principles of the monetary approach to balance of payments analysis to a regime of floating exchange rates, with active intervention by the authorities to control rate movements. It makes four main points. First, the exchange rate is the relative price of different national monies, rather than national outputs, and is determined primarily by the demands and supplies of stocks of different national monies. Second, exchange rates are strongly influenced by asset holder’s expectations of future exchange rates and these expectations are influenced by beliefs concerning the future course of monetary policy. Third, “real” factors, as well as monetary factors, are important in determining the behavior of exchange rates. Fourth, the problems of policy conflict which exist under a system of fixed rates are reduced, but not eliminated, under a regime of controlled floating. A brief appendix develops some of the implications of “rational expectations” for the theory of exchange rates.

Suggested Citation

  • Michael Mussa, 1977. "The Exchange Rate, The Balance Of Payments and Monetary and Fiscal Policy Under A Regime of Controlled Floating," Palgrave Macmillan Books, in: Jan Herin & Assar Lindbeck & Johan Myhrman (ed.), Flexible Exchange Rates and Stabilization Policy, pages 97-116, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-03359-1_9
    DOI: 10.1007/978-1-349-03359-1_9
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    Cited by:

    1. Qian Zhang & Kuo-Jui Wu & Ming-Lang Tseng, 2019. "Exploring Carry Trade and Exchange Rate toward Sustainable Financial Resources: An application of the Artificial Intelligence UKF Method," Sustainability, MDPI, vol. 11(12), pages 1-26, June.
    2. Suresh Ramakrishnan & Shamaila Butt & Melati Ahmad Anuar, 2017. "The Impact of Macroeconomic, Oil Prices and Socio-economic Factors on Exchange Rate in Pakistan: An Auto Regressive Distributed Lag Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 489-499.
    3. Thompson, Alexi & Thompson, Henry, 2018. "The Exchange Rate Regime Switch and Current Account in Greece, 1976-2014," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 71(3), pages 371-386.
    4. Natalia Ponomareva & Jeffrey Sheen & Ben Zhe Wang, 2019. "The common component of bilateral US exchange rates: to what is it related?," Empirical Economics, Springer, vol. 56(4), pages 1251-1268, April.
    5. Munazza Jabeen & Abdul Rashid & Hajra Ihsan, 2022. "The news effects on exchange rate returns and volatility: Evidence from Pakistan," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 745-769, January.
    6. Martin Casta, 2022. "How Credit Improves the Exchange Rate Forecast," Working Papers 2022/7, Czech National Bank.

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