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Monetary and Fiscal Policies in an Open Economy

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  • Jacob A. Frenkel
  • Michael L. Mussa

Abstract

The central theme of this paper is that international linkages between national economies influence, in fundamentally important ways, the effectiveness and proper conduct of national macroeconomic policies. Specifically, our purpose is to summarize the implications for the conduct of macroeconomic policies in open economies of both the traditional approach to open economy macroeconomics (as developed largely by James Meade, Robert Mundell, and J. Marcus Fleming) and of more recent developments. Our discussion is organized around three key linkages between national economies: through commodity trade; through capital mobility; and through exchange of national monies. These linkages have important implications concerning the effects of macroeconomic policies in open economies that differ from the effects of such policies in closed economies. Recent developments in the theory of macroeconomic policy have established conditions for the effectiveness of policies in influencing output and employment which emphasize the distinction between anticipated and unanticipated policy actions, the importance of incomplete information, and the consequences of contracts that fix nominal wages and prices over finite intervals. In this paper, we shall not analyze how these conditions are modified in an open economy. However, since our concern is with macro-economic policy, a principal objective of which is to influence output and employment, we shall assume that requisite conditions for such influence are satisfied.

Suggested Citation

  • Jacob A. Frenkel & Michael L. Mussa, 1980. "Monetary and Fiscal Policies in an Open Economy," NBER Working Papers 0575, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0575
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    References listed on IDEAS

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    1. Dooley, Michael P & Isard, Peter, 1980. "Capital Controls, Political Risk, and Deviations from Interest-Rate Parity," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 370-384, April.
    2. Russell S. Boyer, 1975. "Commodity Markets and Bond Markets in a Small, Fixed-Exchange-Rate Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 8(1), pages 1-23, February.
    3. Frenkel, Jacob A & Levich, Richard M, 1977. "Transaction Costs and Interest Arbitrage: Tranquil versus Turbulent Periods," Journal of Political Economy, University of Chicago Press, vol. 85(6), pages 1209-1226, December.
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    Cited by:

    1. Jacob A. Frenkel, 1983. "International Liquidity and Monetary Control," NBER Working Papers 1118, National Bureau of Economic Research, Inc.
    2. Richard G. Sheehan, 1987. "Does U. S. money growth determine money growth in other nations?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 5-14.
    3. Bhattarai, Keshab & Mallick, Sushanta, 2013. "Impact of China's currency valuation and labour cost on the US in a trade and exchange rate model," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 40-59.
    4. Vajanne, Laura, . "The Exchange Rate Under Target Zones," ETLA A, The Research Institute of the Finnish Economy, number 16.
    5. Gyuhan Kim, 1995. "Exchange rate constraints and money control in Korea," Working Papers 1995-011, Federal Reserve Bank of St. Louis.
    6. Hans Genberg, 1984. "Properties of Innovations in Spot and Forward Exchange Rates and the Role of Money Supply Processes," NBER Chapters,in: Exchange Rate Theory and Practice, pages 153-174 National Bureau of Economic Research, Inc.
    7. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747 Elsevier.
    8. Michael Mussa, 1983. "Optimal Economic Integration," NBER Chapters,in: Financial Policies and the World Capital Market: The Problem of Latin American Countries, pages 41-58 National Bureau of Economic Research, Inc.

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