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A Case for Managed Exchange Rates *
Author(s) -
PRACHOWNY MARTIN F. J.
Publication year - 1979
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1979.tb02215.x
Subject(s) - economics , monetary policy , exchange rate , fiscal policy , aggregate demand , monetary economics , policy mix , adaptive expectations , open economy , government (linguistics) , aggregate (composite) , macroeconomics , process (computing) , rational expectations , linguistics , philosophy , materials science , computer science , composite material , operating system
The incorporation of adaptive expectations by Dornbusch in a Mundell‐Fleming model modifies significantly the traditional results of policy effectiveness in a small, open economy. While monetary policy is still able to influence aggregate demand when flexible exchange rates prevail, the effects of this policy on other important variables in the economy during the adjustment process to a new equilibrium may be considered sufficiently ‘disruptive’ so that the authorities will be hesitant to use their only fully‐effective policy instrument for income‐stabilization purposes. However, by adding a target level for the exchange rate to their list of goal variables and by using an appropriate mix of monetary and fiscal policies, it appears to be possible for the government to avoid these disruptive side effects.