The Macroeconomic Mix in the Open Economy: Basic Arguments

Abstract

When we proceed to consider not only those macroeconomic objectives that relate to the internal aspects of the economy but also those that relate to the ‘open’ or international aspects of an economy, we have to adopt a framework for thinking about macroeconomic policy that embraces three, rather than only two, objectives. We are still interested in holding down unemployment and inflation, but we must now add an objective that relates to the state of a country’s balance of payments on current account, usually considered in the context of its international debtor/creditor position (which is the outcome of the current account surpluses or deficits that it has run in past). The reason for including the cumulative creditor or debtor position of the country as one aspect of the external balance objective is that a country that has large net external assets is clearly much less likely to feel under pressure to reduce a current account deficit of a given order than one with heavy external indebtedness.