Working Paper: CEPR ID: DP185
Authors: Neil Rankin
Abstract: As a companion to a previous paper, monetary and fiscal policy are analyzed in (a) a small open economy and (b) a two-country world, where in addition to a fixed wage causing unemployment, countries now produce specialized products whose prices are fixed, causing excess supply. There are two periods, and perfect foresight. Markets clear in the second period. Exchange rates are flexible, and there is perfect capital mobility. Both monetary and fiscal policy raise domestic output whether the country is small or not, but do not affect foreign output or interest rates. Flexible exchange rates thus recover their "insulating" properties.
Keywords: goods and labour market disequilibrium; two-country world; flexible exchange rates; policy interdependence
JEL Codes: 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary Expansion (E49) | Domestic Output Increase (E23) |
| Monetary Expansion (E49) | Exchange Rate Depreciation (F31) |
| Monetary Expansion (E49) | Real Interest Rate Decrease (E43) |
| Fiscal Policy (E62) | Domestic Output Increase (E23) |
| Fiscal Policy (E62) | Real Interest Rate Decrease (E43) |
| Fiscal Policy (E62) | Current Account Unaffected (F32) |
| Government Spending (H59) | Output Increase (E23) |
| Balanced-Budget Multiplier = Unity (E62) | Consistent Relationship Between Government Spending and Output (H50) |