Since the 1950s we have been witnessing a process of increasing integration in world capital markets and, as a result, capital movements have come to play an increasingly prominent role in balance of payments adjustments. With the advent of flexible exchange rates in the early 1970s, after the collapse of the Bretton Woods system, capital mobility was seen to contribute to enhanced exchange rate volatility and this, in turn, was thought to contribute to the volatility of other macroeconomic variables. The subject of macroeconomic adjustments under flexible exchange rates and capital mobility became a fertile area for theoretical and empirical research and this trend will probably continue in the near future as institutions evolve to deal with issues arising from increasing economic interdependence. Against the background of these developments we have endeavoured to bring together in this book, for the purpose of a systematic and rather in depth treatment, the core elements of the current theory of open economy macroeconomics, not neglecting the major issues confronting policy makers or the empirical evidence, to date, on the major strands of theory. We hope that final year undergraduate students with a good background in macroeconomics and some elementary background in calculus and matrix algebra, and first year postgraduate students attending a course on international macroeconomics will find this book of benefit. It is hoped that practitioners in this field may also benefit from reading this book.
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