Monetary and Fiscal Policies in an Open Economy

15 Pages Posted: 19 Jun 2004 Last revised: 30 Jul 2010

See all articles by Jacob A. Frenkel

Jacob A. Frenkel

Merrill Lynch & Co. - Sovereign Advisory Group and Global Financial Institutions Group; National Bureau of Economic Research (NBER)

Michael L. Mussa

International Monetary Fund (IMF) - Research Department; National Bureau of Economic Research (NBER)

Date Written: October 1980

Abstract

The central theme of this paper is that international linkages between national economies influence, in fundamentally important ways, the effectiveness and proper conduct of national macroeconomic policies. Specifically, our purpose is to summarize the implications for the conduct of macroeconomic policies in open economies of both the traditional approach to open economy macroeconomics (as developed largely by James Meade, Robert Mundell, and J. Marcus Fleming) and of more recent developments. Our discussion is organized around three key linkages between national economies: through commodity trade; through capital mobility; and through exchange of national monies. These linkages have important implications concerning the effects of macroeconomic policies in open economies that differ from the effects of such policies in closed economies. Recent developments in the theory of macroeconomic policy have established conditions for the effectiveness of policies in influencing output and employment which emphasize the distinction between anticipated and unanticipated policy actions, the importance of incomplete information, and the consequences of contracts that fix nominal wages and prices over finite intervals. In this paper, we shall not analyze how these conditions are modified in an open economy. However, since our concern is with macro-economic policy, a principal objective of which is to influence output and employment, we shall assume that requisite conditions for such influence are satisfied.

Suggested Citation

Frenkel, Jacob A. and Mussa, Michael L., Monetary and Fiscal Policies in an Open Economy (October 1980). NBER Working Paper No. w0575. Available at SSRN: https://ssrn.com/abstract=264412

Jacob A. Frenkel (Contact Author)

Merrill Lynch & Co. - Sovereign Advisory Group and Global Financial Institutions Group

New York, NY
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael L. Mussa

International Monetary Fund (IMF) - Research Department

700 19th Street NW
Washington, DC 20431
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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