The Effectiveness of Stabilization Policy in a Small Open Economy

A small open economy is forced to operate in a constrained policy environment. Although for some products even a small country may have some monopoly power, in the aggregate these countries approximate more closely the behaviour of price takers than price makers. It is to economies such as these, and not larger or closed economies, that the analysis of this paper is devoted. The extremity of the assumptions is such as to make the analysis totally inapplicable to countries such as the United States. The purpose of the paper, then, is to investigate the characteristics peculiar to a small open economy and to incorporate them in a model which will allow us to discuss the effectiveness of stabilization policy in this constrained environment. In particular, it is proposed to re-examine Mundell's conclusions about monetary and fiscal policy under fixed and flexible exchange rates and to show that, under flexible exchange rates, an optimum policy combination exists that eliminates the trade-off between inflation and unemployment. As is common in these stabilization policy models, growth in factor supplies, and therefore output, is assumed not to exist.

The Inflationary Process in Open Economies

While the concept of "imported inflation" and its relevance for open economies have received considerable attention in the policy-oriented literature, the theoretical underpinnings of this phenomenon have not been constructed as carefully as might be desirable in view of the controversial nature of the subject. The inflationary process can be transmitted to a country by developments in international capital and money markets or through the interaction of goods markets in one country with those of the rest of the world. The debate concerning the former transmission mechanism involves the difficulties in dichotomizing the balance of payments and the domestic money supply through the sterilization of foreign exchange gains or losses. In this paper, major emphasis will be given to the transmission of the inflationary process through the goods and services markets. Primarily,we are interested in investigating the determinants of the rate of inflation for a small country which, because of its size, is forced to accept certain conditions imposed by the external environment.

The Composition of Official International Reserves

The balance of this paper will take the following form: a hypothesis concerning the portfolio manangement of international reserves will be stated; then, this hypothesis will be tested statistically; finally, a discussion of these results and their meaning for the future will conclude the paper.

Direct Investment In The U.S. Balance Of Payments--A Portfolio Approach

The active control and operation of firms in other countries implied by direct foreign investment has dominated the international investment position of the U.S. vis-a-vis the rest of the world. At the end of 1967, 73% of U.S.long term foreign assets were held in the form of direct investment. On the other side of the coin, 35% of foreign long-term assets held in the U.S. were in this category. It is the purpose of this paper to explain the demand for these direct investment assets, both U.S. investment abroad and foreign investment in the U.S.

A Devaluation Model for a Small Open Economy

The purpose of this paper is to develop a devaluation model for a small open economy that incorporates the crucial features of non-traded goods, money, and the requirements of portfolio equilibrium. Also, it will be shown in the paper that the exchange rate influences the price level and aggregate output, and therefore it can become a tool of stabilization policy, especially if monetary and fiscal policies are unavailable for this purpose

Direct Investment In The U.S. Balance Of Payments--A Portfolio Approach

The active control and operation of firms in other countries implied by direct foreign investment has dominated the international investment position of the U.S. vis-a-vis the rest of the world. At the end of 1967, 73% of U.S.long term foreign assets were held in the form of direct investment. On the other side of the coin, 35% of foreign long-term assets held in the U.S. were in this category. It is the purpose of this paper to explain the demand for these direct investment assets, both U.S. investment abroad and foreign investment in the U.S

The Effectiveness of Stabilization Policy in a Small Open Economy

A small open economy is forced to operate in a constrained policy environment. Although for some products even a small country may have some monopoly power, in the aggregate these countries approximate more closely the behaviour of price takers than price makers. It is to economies such as these, and not larger or closed economies, that the analysis of this paper is devoted. The extremity of the assumptions is such as to make the analysis totally inapplicable to countries such as the United States. The purpose of the paper, then, is to investigate the characteristics peculiar to a small open economy and to incorporate them in a model which will allow us to discuss the effectiveness of stabilization policy in this constrained environment. In particular, it is proposed to re-examine Mundell's conclusions about monetary and fiscal policy under fixed and flexible exchange rates and to show that, under flexible exchange rates, an optimum policy combination exists that eliminates the trade-off between inflation and unemployment. As is common in these stabilization policy models, growth in factor supplies, and therefore output, is assumed not to exist

The Inflationary Process in Open Economies

While the concept of "imported inflation" and its relevance for open economies have received considerable attention in the policy-oriented literature, the theoretical underpinnings of this phenomenon have not been constructed as carefully as might be desirable in view of the controversial nature of the subject. The inflationary process can be transmitted to a country by developments in international capital and money markets or through the interaction of goods markets in one country with those of the rest of the world. The debate concerning the former transmission mechanism involves the difficulties in dichotomizing the balance of payments and the domestic money supply through the sterilization of foreign exchange gains or losses. In this paper, major emphasis will be given to the transmission of the inflationary process through the goods and services markets. Primarily,we are interested in investigating the determinants of the rate of inflation for a small country which, because of its size, is forced to accept certain conditions imposed by the external environment

The Composition of Official International Reserves

The balance of this paper will take the following form: a hypothesis concerning the portfolio manangement of international reserves will be stated; then, this hypothesis will be tested statistically; finally, a discussion of these results and their meaning for the future will conclude the paper