Open AccessFiscal and Monetary Policy for Internal and External Stabilization Under Fixed and Floating Rates in the Presence of Capital Movements
Author(s) -
Rattan J. Bhatia
Publication year - 1975
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v14i1pp.23-32
Subject(s) - economics , monetary economics , fixed exchange rates , monetary policy , fiscal policy , capital (architecture) , exchange rate , exchange rate regime , stabilization policy , macroeconomics , archaeology , history
The effect of fiscal and monetary stabilization policies hasbeen exten¬sively discussed, notably by Mundell [4,5] and Fleming [1].Mundell discussed the problem under the special assumption of a perfectinterest-elastic mobility of international capital flows, but Flemingassumed a less than perfect capital mobility. Mundell contends that"fiscal policy completely loses its force as a domestic stabilizer whenthe exchange rate is allowed to fluctuate," while monetary policy willhave appreciable effects on employment and output. Under fixed exchangerates, on the other hand, monetary policy is shown by Mundell to beineffective while any positive effects of fiscal policy would beconditional upon the country being able to sustain large trade deficitsby either borrowing abroad or running down its accumulated internationalreserves. Fleming also demonstrates that the expansionary effects ofmonetary policy will be greater under floating exchange rates than underfixed rates and that it is uncertain whether the effects of fiscalpolicy will be less or more expansionary under floating rates than underfixed rates. In all but extreme cases, monetary policy is shown to exerta more expansionary influence under floating rates.