IDEAS home Printed from https://ideas.repec.org/a/taf/revpoe/v25y2013i1p57-67.html
   My bibliography  Save this article

Open Economy Monetary Policy Reconsidered

Author

Listed:
  • John Weeks

Abstract

The standard policy rule of the Mundell-Fleming model states that under a flexible exchange rate regime with perfectly elastic capital flows, monetary policy is effective and fiscal policy is not. The rule ignores the effect of a change in the nominal exchange rate on the domestic price level. The price level effect is noted in some textbooks, but not formally analyzed. When subjected to a rigorous analysis, the interaction of the exchange rate and the domestic price level substantially changes the standard policy rule. The logically correct statement would be, with a flexible exchange rate and perfectly elastic capital flows, the effectiveness of monetary policy depends on the marginal import propensity and the sum of the trade elasticities. Typical values for these parameters suggest that the effectiveness of monetary policy under flexible exchange rates can be low even if capital flows are perfectly elastic. Because these same parameters have the opposite effect on fiscal policy, the relative effectiveness of fiscal and monetary interventions under a flexible exchange rate is an empirical issue that cannot be determined a priori.

Suggested Citation

  • John Weeks, 2013. "Open Economy Monetary Policy Reconsidered," Review of Political Economy, Taylor & Francis Journals, vol. 25(1), pages 57-67, January.
    • Handle: RePEc:taf:revpoe:v:25:y:2013:i:1:p:57-67
    DOI: 10.1080/09538259.2013.737123
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/09538259.2013.737123
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09538259.2013.737123?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Warren Young & William Darity, Jr., 2004. "IS-LM-BP: An Inquest," History of Political Economy, Duke University Press, vol. 36(5), pages 127-164, Supplemen.
    2. Mohsen Bahmani-Oskooee & Orhan Kara, 2003. "Relative Responsiveness of Trade Flows to a Change in Prices and Exchange Rate," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(3), pages 293-308.
    3. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(1), pages 230-231, January.
    4. Boyd, Derick & Caporale, Gugielmo Maria & Smith, Ron, 2001. "Real Exchange Rate Effects on the Balance of Trade: Cointegration and the Marshall-Lerner Condition," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(3), pages 187-200, July.
    5. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(4), pages 876-878, October.
    6. J. Marcus Fleming, 1962. "Domestic Financial Policies under Fixed and under Floating Exchange Rates (Politiques finacièrieures intérieures avec un système de taux de change fixe et avec un système de taux de change fluctua," IMF Staff Papers, Palgrave Macmillan, vol. 9(3), pages 369-380, November.
    7. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(3), pages 619-631, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yu Hsing, 2012. "Test of the trilemma for five selected Asian countries and policy implications," Applied Economics Letters, Taylor & Francis Journals, vol. 19(17), pages 1735-1739.
    2. Ahmed, Walid M.A., 2020. "Corruption and equity market performance: International comparative evidence," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    3. Gita Gopinath & Emine Boz & Camila Casas & Federico J. Díez & Pierre-Olivier Gourinchas & Mikkel Plagborg-Møller, 2020. "Dominant Currency Paradigm," American Economic Review, American Economic Association, vol. 110(3), pages 677-719, March.
    4. Boivin, Jean & Kiley, Michael T. & Mishkin, Frederic S., 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 8, pages 369-422, Elsevier.
    5. Guglielmo Maria Caporale & Thouraya Hadj Amor & Christophe Rault, 2011. "Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic GMM Panel Approach," CESifo Working Paper Series 3645, CESifo.
    6. Alizadeh Janvisloo , Mohammad Reza & Sherafatian-Jahromi , Reza, 2019. "Macroeconomic, International Linkage and Effects of External Shocks in Southeast Asian Emerging Economies," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 14(2), pages 205-230, April.
    7. Alexandre Flávio Silva Andrada, 2011. "Uma Breve História Sobre A Abordagem Dedesequilíbrio Na Economia," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting] 233, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    8. Khosrow Doroodian & Chulho Jung & Roy Boyd, 1999. "The J-curve effect and US agricultural and industrial trade," Applied Economics, Taylor & Francis Journals, vol. 31(6), pages 687-695.
    9. Slim, Sadri, 2015. "Un modelo Mundell-Fleming con economía ilegal y lavado de dinero [Modeling illegal economy and money laundering: a Mundell-Fleming framework]," MPRA Paper 64675, University Library of Munich, Germany.
    10. John Weeks, 2009. "The Effectiveness of Monetary Policy Reconsidered," Working Papers wp202, Political Economy Research Institute, University of Massachusetts at Amherst.
    11. Agnieszka Stazka, 2006. "Sources of Real Exchange Rate Fluctuations in Central and Eastern Europe – Temporary or Permanent?," CESifo Working Paper Series 1876, CESifo.
    12. Dirk Steffen & Ingo Pitterle, 2004. "Spillover Effects of Fiscal Policy Under Flexible Exchange Rates," Econometric Society 2004 Australasian Meetings 286, Econometric Society.
    13. Edward Ghartey, 2006. "Exchange Pressure, Sterilized Intervention and Monetary Policy in Ghana," EcoMod2006 272100031, EcoMod.
    14. Jyh-Lin Wu, 1994. "Fiscal announcements and real exchange rate dynamics," Open Economies Review, Springer, vol. 5(2), pages 177-190, March.
    15. Amir H. Mozayani & Sanaz Parvizi, 2016. "Exchange Rate Misalignment in Oil Exporting Countries (OPEC): Focusing on Iran," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 20(2), pages 261-276, Spring.
    16. Michael Michaely, 1971. "An Over-all View of Policy Patterns," NBER Chapters, in: The Responsiveness of Demand Policies to Balance of Payments: Postwar Patterns, pages 30-70, National Bureau of Economic Research, Inc.
    17. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 16-11.
    18. Busse, Matthias & Shams, Rasul, 2003. "Trade Effects of the East African Community: Do We Need a Transitional Fund?," HWWA Discussion Papers 240, Hamburg Institute of International Economics (HWWA).
    19. repec:zbw:bofitp:2008_005 is not listed on IDEAS
    20. Yana Valeryevna Dyomina, 2019. "Cross-Border Capital Flows in East Asia: Impact of Monetary Policy Measures," Spatial Economics=Prostranstvennaya Ekonomika, Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences (Khabarovsk, Russia), issue 3, pages 99-124.
    21. Svitlana Galeshchuk, 2017. "Technological bias at the exchange rate market," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 24(2-3), pages 80-86, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:revpoe:v:25:y:2013:i:1:p:57-67. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/CRPE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.