Capital Mobility and Stabilization Policy
Under Fixed and Flexible Exchange Rates

Capital Mobility and Stabilization Policy Under Fixed and Flexible Exchange Rates

Reprinted in Readings in International Economics, (ed. R.Caves and H. Johnson) Published by the American Economic Association by Richard D.Irwin, Inc. 1967)
22 pages
Price: $10

 

“A pioneering article(1963) [that] addresses the short-run effects of monetary and fiscal policy in an open economy.”

“Mundell’s scientific contributions are original. Yet they quickly transformed the research in international macroeconomics and attracted increasing attention in the practically oriented discussion of stabilization policy and exchange rate systems.”

Introduction to the 1963 study:

The world is still a closed economy, but its regions and countries are becoming increasingly open. The trend, which has been manifested in both freer movement of goods and increased mobility of capital, has been stimulated by the dismantling of trade and exchange controls in Europe, the gradual erosion of the real burden of tariff protection, and the stability, unparalleled since 1914, of the exchange rates. The international economic climate has changed in the direction of financial integration’ and this has important implications for economic policy.

My paper concerns the theoretical and practical implications of the increased mobility of capital. In order to present my conclusions in the simplest possible way and to bring the implications for policy into sharpest relief, I assume the extreme degree of mobility that prevails when a country cannot maintain Are an interest rate different from the general level prevailing abroad. This assumption will overstate the case but it has the merit of posing a stereotype towards which international financial relations seem to be heading.

At the same time it might be argued that the assumption is not far from the truth in those financial centres, of which Zurich, Amsterdam, and Brussels may be taken as examples, where the authorities already recognize their lessening ability to dominate money market conditions and insulate them from foreign influences. It should also have a high degree of relevance to a country like Canada whose financial markets are dominated to a great degree by the vast New York market.