Monetary Theory and Policy in an Open Economy

Abstract

This paper identifies several respects in which analysis of the macro-economics of small open economies has to be modified beyond its development a decade ago, with special reference to the effectiveness of monetary and fiscal policies under alternative exchange rate regimes. Capital movements must be viewed in the context of portfolio equilibrium rather than as continuous flows. Room must be made in monetarist formulations for holdings of foreign money. The impact of changes in exchange rates on nominal factor prices should be taken into account. And the effect of the exchange rate regime on the magnitude of the stabilization task must figure in any evaluation of alternative exchange rate regimes. Suggestions are made along each of these lines. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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