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Weak Policy in an Open Economy: The US with a Floating Exchange Rate, 1974-2009

Author

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  • Henry Thompson

    (Economics Department, Auburn University, Auburn, AL 36849, U.S.A.)

Abstract

This paper examines the effectiveness of US macroeconomic policy in an open economy model focused on the exchange rate and trade balance. Yearly data cover the period of the dollar float from 1974 to 2009. Monetary expansion raises output weakly but depreciates the dollar and lowers the trade balance. Fiscal “expansion” decreases output. There is a polar deficit effect between the government budget and trade balance. These results question a number of standard policy prescriptions. The implied structural coefficients suggest rethinking a number of accepted theoretical assumptions.

Suggested Citation

  • Henry Thompson, 2012. "Weak Policy in an Open Economy: The US with a Floating Exchange Rate, 1974-2009," Economic Analysis and Policy, Elsevier, vol. 42(3), pages 339-350, December.
    • Handle: RePEc:eee:ecanpo:v:42:y:2012:i:3:p:339-350
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