Summary
This paper examines the use of monetary and fiscal policy in a small country model under floating exchange rates. The government attempts to achieve a target level of economic activity and either an investment spending (output composition) or current account target. However, a choice may have to be made between the latter two objectives because a trade-off exists between them as the monetary-fiscal policy mix changes. It is shown that either monetary or fiscal policy can be assigned to the GNP target, and the second policy to one of the other targets, although the path may be oscillatory.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Dornbusch, R.,Open Economy Macroeconomics, New York, 1980.
Dornbusch, R., ‘Real Interest Rates, Home Goods, and Optimal External Borrowing,‘Journal of Political Economy, February, 1983, pp. 141–153.
Fleming, J.M., ‘Domestic Financial Policies under Fixed and under Floating Exchange Rates,’I.M.F. Staff Papers, No. 3, 1962, reprinted in: R.N. Cooper (ed.),International Finance, Harmondsworth, 1969.
Gordon, R.J.,Macroeconomics, Boston and Toronto, 1984.
Johnson, H.G., ‘Theoretical Problems of the International Monetary System,’Pakistan Development Review (1967), reprinted in: R.N. Cooper (ed.),International Finance, Harmondsworth, 1969.
Levin, J.H., ‘The Dynamics of Stabilization Policy under Flexible Exchange Rates: A Synthesis of the Asset and Neo-Keynesian Approaches,’Oxford Economic Papers, November, 1980, pp. 411–427.
Mundell, R.A., ‘The Appropriate Use of Monetary and Fiscal Policy under Fixed Exchange Rates,’I.M.F. Staff Papers, March, 1962, reprinted as Chapter 16 in: R.A. Mundell,International Economics, London, 1968.
Mundell, R.A., ‘Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates,’ reprinted as Chapter 18 in: R.A. Mundell,International Economics, London, 1968.
Phillips, A. W., ‘Stabilization Policy in a Closed Economy,’Economic Journal, June, 1954.
Sachs, J.D., ‘The Current Account and Macroeconomic Adjustment in the 1970's,’Brookings Papers on Economic Activity, 1: 1981, pp. 201–282.
Salop, J. and E. Spitäller, ‘Why Does the Current Account Matter?’I.M.F. Staff Papers, March, 1980, pp. 101–134.
Willett, T.D. and F. Forte, ‘Interest Rate Policy and External Balance,’Quarterly Journal of Economics, May, 1969, pp. 242–262.
Author information
Authors and Affiliations
Additional information
The author is grateful to the referee for helpful comments but must absolve him from all remaining errors.
Rights and permissions
About this article
Cite this article
Levin, J.H. Monetary-fiscal policy assignment under floating exchange rates. De Economist 134, 467–478 (1986). https://doi.org/10.1007/BF01423606
Issue Date:
DOI: https://doi.org/10.1007/BF01423606