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Stabilization Policies in Open Economies

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  • Richard C. Marston
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    This study analyzes the theory of stabilization policy as it has developed from the trade oriented models of the 1950's to the recent models employing rational expectations. Throughout the study one model is presented with appropriate modifications to take into account international capital mobility, wage flexibility, and rational expectations. The Mundell-Fleming model is presented but with an asset sector based on modern portfolio theory. This same model is analyzed under conditions of full wage and price flexibility, and the propositions associated with the monetary approach to the balance of payments and the exchange rate are discussed. A simplified version of the model is then used to examine the policy ineffectiveness propositions of the new classical economics (as applied to open economies). The study concludes with a brief review of the literature on the choice between exchange rate regimes.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1117.

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    Date of creation: May 1983
    Publication status: published as Marston, Richard C. "Stabilizaiton Policies in Open Economies." Handbookof International Economics, Vol. II, edited by R.W. Jones and P.B. Kenen, pp. 859-916. Amsterdam: Elsevier Science PublishersB.V., 1985.
    Handle: RePEc:nbr:nberwo:1117
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