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Monetary Policy: Domestic Targets and International Constraints

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  • Jacob A. Frenkel

Abstract

This paper argues that macroeconomic policies for open economies differ, in fundamentally important ways, from the corresponding policies for closed economies.The openness of the economy imposes constraints on the effectiveness and proper conduct of macroeconomic policies and it also provides policy makers with infor-mation which may be usefully exploited in the design of policy. The discussion in this paper focuses on the dependence of monetary policy on the constraints and the information that are provided by the external sector. Section I summarizes briefly the characteristics of the international constraints on monetary policy.Section II deals with intervention in the foreign-exchange market and its relation to monetary policy. In this context the distinction between sterilized and non-sterilized interventions is drawn and the implications of the various forms of intarventions for the effectiveness of monetary policy are examined. Finally,Section III addresses the question of the role that exchange rates should play in the design of monetary policy. It is argued that data from the market for foreign exchange in combination with data on interest rates can provide the monetary authorities with useful information on money market conditions and thereby can contribute to the improved conduct of monetary policy.

Suggested Citation

  • Jacob A. Frenkel, 1983. "Monetary Policy: Domestic Targets and International Constraints," NBER Working Papers 1067, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1067
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    References listed on IDEAS

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    1. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, vol. 70(2), pages 374-381, May.
    2. Obstfeld, Maurice, 1983. "Exchange rates, inflation, and the sterilization problem: Germany, 1975-1981," European Economic Review, Elsevier, vol. 21(1-2), pages 161-189.
    3. Mussa, Michael, 1976. "The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-248.
    4. Frenkel, Jacob A. & Aizenman, Joshua, 1982. "Aspects of the optimal management of exchange rates," Journal of International Economics, Elsevier, vol. 13(3-4), pages 231-256, November.
    5. Frenkel, Jacob A, 1981. "Flexible Exchange Rates, Prices, and the Role of "News": Lessons from the 1970s," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 665-705, August.
    6. Henderson, Dale W, 1977. "Modeling the Interdependence of National Money and Capital Markets," American Economic Review, American Economic Association, vol. 67(1), pages 190-199, February.
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    Cited by:

    1. Kim Kyung Soo, 2000. "Foreign Exchange Intervention For Internal Balance," International Economic Journal, Taylor & Francis Journals, vol. 14(4), pages 59-75.
    2. Santiago Camara, 2021. "Spillovers of US Interest Rates: Monetary Policy & Information Effects," Papers 2111.08631, arXiv.org, revised Feb 2023.
    3. Herrera Revuelta, Julio, 1997. "Expectativas racionales y política monetaria endógena en la determinación del tipo de cambio. Una ampliación empírica a la pseta-dolar y la peseta-ecu," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 7, pages 39-66, Junio.
    4. Jacob A. Frenkel & Morris Goldstein, 1988. "The International Monetary System: Developments and Prospects," Cato Journal, Cato Journal, Cato Institute, vol. 8(2), pages 285-314, Fall.
    5. Papell, David H., 1985. "Activist monetary policy, imperfect capital mobility, and the overshooting hypothesis," Journal of International Economics, Elsevier, vol. 18(3-4), pages 219-240, May.
    6. Santiago Camara & Maximo Sangiacomo, 2022. "Borrowing Constraints in Emerging Markets," Papers 2211.10864, arXiv.org.
    7. Santiago Camara & Sebastian Ramirez Venegas, 2022. "The Transmission of US Monetary Policy Shocks: The Role of Investment & Financial Heterogeneity," Papers 2209.11150, arXiv.org.
    8. Rabeau, Yves, 1986. "Les paradoxes d’une expansion en période de déflation," L'Actualité Economique, Société Canadienne de Science Economique, vol. 62(4), pages 620-628, décembre.
    9. Robert E. Keleher, 1990. "Monetarism And The Use Of Market Prices As Monetary Policy Indicators," Contemporary Economic Policy, Western Economic Association International, vol. 8(2), pages 36-49, April.
    10. Hushak, Leroy J., 1985. "The Exchange Rate And Agriculture: Real Issue Or Dead Horse!," 1985 Annual Meeting, August 4-7, Ames, Iowa 278660, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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