Working Paper: NBER ID: w1117
Authors: Richard C. Marston
Abstract: 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.
Keywords: stabilization policy; open economies; capital mobility; rational expectations; Mundell-Fleming model
JEL Codes: F41; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed exchange rates (F31) | monetary policy effectiveness (E52) |
| monetary policy effectiveness (E52) | output (C67) |
| fiscal policy effectiveness (E62) | output (C67) |
| fiscal policy effectiveness (E62) | interest rates (E43) |
| capital mobility (F20) | fiscal policy effectiveness (E62) |
| exchange rate changes (F31) | domestic variables (C29) |
| government spending (H59) | domestic output (E23) |